Pacific Life Insurance Company et al v. The Bank of New York Mellon
Filing
326
[UN]SEALED OPINION AND ORDER ADOPTING IN PART REPORT AND RECOMMENDATION for 292 Report and Recommendations: For the reasons discussed in this Opinion, the Court adopts the majority of the Report's findings and analysis. Specifically, the Co urt: (i) adopts in full its standing analysis; (ii) adopts in full its issue preclusion analysis; (iii) adopts its analysis that the Settlement Date bars many of Plaintiffs' claims, and rejects in part its analysis of the timeliness of specifi c claims; (iv) adopts its tort claims analysis; and (v) adopts those findings to which the parties have not objected. The remainder of the parties' cross-motions for summary judgment are denied without prejudice to their renewal before Judge L ehrburger. The parties are hereby ORDERED to submit a joint letter proposing redactions to this Opinion on or before August 11, 2023. The Clerk of Court is directed to unstay this case and to terminate the motions pending at docket entries 231 and 2 45. The Clerk of Court is further directed to file this Order under seal, viewable only to the parties and the Court. The Court refers this case back to Judge Lehrburger for proceedings consistent with this Opinion. (Signed by Judge Katherine Polk Failla on 7/14/2023) ***This document was previously filed under seal at Doc. #319, and unsealed without redactions pursuant to the parties' letter at Doc. #325. (tn)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
PACIFIC LIFE INSURANCE COMPANY and
PACIFIC LIFE & ANNUITY COMPANY,
Plaintiffs,
-v.THE BANK OF NEW YORK MELLON,
17 Civ. 1388 (KPF)
SEALED
OPINION AND ORDER
ADOPTING IN PART
REPORT AND
RECOMMENDATION
Defendant.
KATHERINE POLK FAILLA, District Judge:
This case is one of many emanating from the 2008 financial crisis and
the concomitant implosion of the residential mortgage-backed securities
(“RMBS”) market. Plaintiffs Pacific Life Insurance Company and Pacific Life &
Annuity Company (“Plaintiffs”) brought this suit against The Bank of New York
Mellon (“Defendant”) in 2017. Specifically, Plaintiffs contend that Defendant,
acting as the trustee of several RMBS trusts, breached numerous duties to
certificateholders like Plaintiffs by failing to enforce certain obligations imposed
on Countrywide Home Loans, Inc. (“Countrywide”) pursuant to various trust
documents.
This case has had an extensive procedural history; this Court has
already decided both a motion to dismiss and a motion for reconsideration.
Most recently, Judge Robert W. Lehrburger issued a comprehensive report and
recommendation (the “Report”) on the parties’ dueling summary judgment
motions. The Report addresses several threshold issues; if adopted, the Report
would substantially narrow the issues left in this case. For the reasons that
follow, the Court adopts the Report’s standing findings; adopts the Report’s
issue preclusion findings; adopts in part the Report’s statute of limitations
findings; adopts the Report’s tort claims findings; and adopts those findings to
which the parties have not objected. Ultimately, the Court refers this case
back to Judge Lehrburger for proceedings consistent with this Opinion.
BACKGROUND 1
A.
Factual Background
The Court has discussed the factual and procedural backgrounds of this
case at length in two prior decisions. See Pac. Life Ins. Co. v. Bank of N.Y.
Mellon, No. 17 Civ. 1388 (KPF), 2018 WL 1382105 (S.D.N.Y. Mar. 16, 2018)
(“PacLife I”) (granting in part and denying in part Defendant’s motion to
dismiss); Pac. Life Ins. Co. v. Bank of N.Y. Mellon, No. 17 Civ. 1388 (KPF), 2018
WL 1871174 (S.D.N.Y. Apr. 17, 2018) (“PacLife II”) (denying Defendant’s motion
1
This Opinion draws its facts primarily from the parties’ Local Rule 56.1 statements
submitted in connection with their cross-motions for summary judgment. These
include Defendant’s Local Rule 56.1 Statement of Undisputed Facts (Dkt. #233 (“Def.
56.1”)); Plaintiffs’ counter-statement of undisputed facts (Dkt. #255 (“Pl. 56.1”));
Defendant’s reply to Plaintiffs’ counter-statement of undisputed facts (Dkt. #265 (“Def.
Reply 56.1”)); and Plaintiffs’ reply counter-statement of undisputed facts (Dkt. #276 (“Pl.
Reply 56.1”)). Citations to a party’s Rule 56.1 Statement incorporate by reference the
documents cited therein. The Court also references the declarations submitted by the
parties in connection with their cross-motions for summary judgment and the exhibits
thereto, which are cited using the convention “[Name] Decl., Ex. [ ].” In particular, the
Court draws heavily from the settlement agreement between Defendant and
Countywide/Bank of America (Houpt Decl., Ex. 17 (“Settlement”)); the Amended Expert
Report of Christopher J. Milner (Dkt. #252-1 (“Milner Report”)); and the Pooling and
Servicing Agreement for CWALT 2006-32CB (Houpt Decl., Ex. 49 (“PSA”)).
For ease of reference, the Court refers to Defendant’s partial objection to the Report as
“Def. Br.” (Dkt. #297); to Plaintiffs’ objections as “Pl. Br.” (Dkt. #298); to Defendant’s
opposition to Plaintiffs’ objections as “Def. Opp.” (Dkt. #300); to Plaintiffs’ opposition to
Defendant’s objection as “Pl. Opp.” (Dkt. #299); to Plaintiffs’ reply in further support of
their objections as “Pl. Reply” (Dkt. #302); and to Defendant’s reply in further support of
its objection as “Def. Reply” (Dkt. #305).
2
for reconsideration). Given the specificity of those decisions, the absence of
dispute as to the basic background facts, and the comprehensiveness of Judge
Lehrburger’s Report, the Court limits its factual recitation in this Opinion. In
particular, the Court focuses on three factual matters relevant to the issues of
preclusion and timeliness: (i) the settlement entered into between Defendant
and Countrywide in 2011 (the “Settlement”); (ii) the state court proceeding
conducted pursuant to New York Civil Practice Law and Rules (“CPLR”)
Article 77 (“Article 77”) to approve the Settlement; and (iii) Plaintiffs’ claims in
this litigation.
B.
Procedural Background
Plaintiffs filed the complaint in this case on February 23, 2017. (Dkt.
#1). Shortly thereafter, Defendant moved to dismiss the complaint for failure to
state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). (Dkt. #2830). The Court granted in part and denied in part Defendant’s motion in
PacLife I. (Dkt. #53). See PacLife I, 2018 WL 1382105, at *1. Defendant then
moved for reconsideration of the Court’s decision, arguing that the Court had
misapprehended the significance of certain facts and overlooked controlling
appellate authority. (Dkt. #57-58). The Court denied this motion, finding in
PacLife II that Defendant’s arguments failed to meet the “strict standard”
applicable to motions for reconsideration. (Dkt. #61). See PacLife II, 2018 WL
1871174, at *1. Following PacLife II, Defendant filed its answer to the
complaint (Dkt. #62) and the parties proceeded to discovery (Dkt. #66).
3
On October 2, 2020, Plaintiffs and Defendant filed motions in limine to
exclude the testimony of the other side’s expert witnesses. (Dkt. #150-165).
The Court referred the motions, as well as the parties’ contemplated motions
for summary judgment, to Judge Lehrburger for resolution on December 8,
2020. (Dkt. #213). On February 22, 2021, Judge Lehrburger issued a decision
on the parties’ respective motions in limine, granting them in part and denying
them in part. (Dkt. #216). See Pac. Life Ins. Co. v. Bank of N.Y. Mellon, No. 17
Civ. 1388 (KPF) (RWL), 2021 WL 673479, at *1 (S.D.N.Y. Feb. 22, 2021).
Defendant filed objections to Judge Lehrburger’s decision on March 8, 2021
(Dkt. #218), and the Court rejected Defendant’s objection and affirmed Judge
Lehrburger’s decision on November 15, 2021 (Dkt. #278). See Pac. Life Ins. Co.
v. Bank of New York Mellon, 571 F. Supp. 3d 106, 110 (S.D.N.Y. 2021).
Following the submission of the parties’ motions in limine but prior to the
Court’s order affirming the challenged portions of Judge Lehrburger’s decision
on those motions, the parties filed cross-motions for summary judgment
pursuant to Federal Rule of Civil Procedure 56. More specifically, on June 7,
2021, Defendant filed its motion for partial summary judgment and supporting
papers. (Dkt. #231-236). On August 6, 2021, Plaintiffs filed a consolidated
cross-motion for summary judgment and brief in opposition to Defendant’s
motion. (Dkt. #245-253). Defendant then filed its consolidated brief in
opposition to Plaintiffs’ motion and reply brief in further support of its motion
on October 5, 2021. (Dkt. #262-263). On November 4, 2021, Plaintiffs filed
their reply brief in further support of their motion. (Dkt. #275-277). After the
4
close of briefing, on February 2, 2022, Judge Lehrburger held oral argument on
the motions. (See Minute Entry for February 2, 2022).
In a meticulous report and recommendation dated February 22, 2022,
Judge Lehrburger resolved certain threshold issues raised in the parties’
submissions and deferred judgment on the merits of the parties’ claims
pending this Court’s resolution of any objections to the Report. (Dkt. #292
(“Report”)). See Pac. Life Ins. Co. v. Bank of New York Mellon, No. 17 Civ. 1388
(KPF) (RWL), 2022 WL 1446552, at *1 (S.D.N.Y. Feb. 22, 2022). As a
preliminary matter, Judge Lehrburger found that Plaintiffs had standing to
bring their claims in federal court. (Report 4). Notwithstanding their ability to
sue, however, Judge Lehrburger concluded that Plaintiffs were precluded from
bringing the bulk of their claims by the doctrine of res judicata. (Id.). “If
adopted,” Judge Lehrburger explained, his finding as to res judicata would
“dispense with most of [Plaintiffs’] claims.” (Id.). Judge Lehrburger also
resolved several other issues, finding that (i) most of Plaintiffs’ claims were also
time-barred; (ii) Defendant was entitled to summary judgment on Plaintiffs’
claims for negligence; (iii) Defendant was not entitled to summary judgment on
claims related to two trusts that incurred no monetary damages; and
(iv) Plaintiffs were entitled to summary judgment on Defendant’s affirmative
defenses grounded in champerty, monoline insurance, collateral source
recovery, mitigation, and reliance, all of which Judge Lehrburger found to have
been abandoned. (Id.). Lastly, Judge Lehrburger requested that the case be
5
remanded to him following this Court’s resolution of the parties’ objections to
the Report in order to allow him to resolve any surviving claims. (Id.).
On February 23, 2022, the Court issued a scheduling order staying the
case to allow the parties additional time to brief their objections to the Report.
(Dkt. #294). The parties filed their objections on April 6, 2022 (Dkt. #297
(Defendant), 298 (Plaintiffs)), briefs in opposition to the other’s objections on
May 18, 2022 (Dkt. #299 (Plaintiffs), 300 (Defendant)), and reply briefs on
June 8, 2022 (Dkt. #302 (Plaintiffs), 305 (Defendant)). Over the ensuing
months, the parties have filed notices of supplemental authority, as well as
responses to such notices. (Dkt. #308-313, 318).
On July 14, 2023, the Court filed and provided to the parties an
unredacted copy of this Opinion under seal and allowed the parties to propose
redactions in accordance with Lugosch v. Pyramid Co. of Onondaga, 435 F.3d
110 (2d Cir. 2006). On or before August 11, 2023, the parties shall file a joint
letter suggesting redactions to the Opinion. Taking the parties’ suggestions
into consideration, the Court will then file a redacted version of the Opinion on
the public docket.
DISCUSSION
A.
Applicable Law
1.
Reports and Recommendations of a Magistrate Judge
When reviewing a magistrate judge’s report and recommendation, a
district court “may accept, reject, or modify, in whole or in part, the findings or
recommendations made by the magistrate judge.” 28 U.S.C. § 636(b)(1)(C); see
6
generally United States v. Romano, 794 F.3d 317, 340 (2d Cir. 2015). “To
accept those portions of the Report to which no timely objection has been
made, ... a district court need only satisfy itself that there is no clear error on
the face of the record.” Herrara v. 12 Water St. Gourmet Cafe, Ltd., No. 13 Civ.
4370 (JMF), 2016 WL 1268266, at *1 (S.D.N.Y. Mar. 31, 2016). By contrast, a
district court must review de novo “those portions of the Report or specified
proposed findings or recommendations to which objection is made.” 28 U.S.C.
§ 636(b)(1)(C); see also Fed. R. Civ. P. 72(b)(3); Miller v. Brightstar Asia, Ltd., 43
F.4th 112, 120 (2d Cir. 2022). In undertaking this review, “[i]t is sufficient that
the Court ‘arrive at its own independent conclusion regarding those portions of
the Report to which objections are made,’ and the Court ‘need not conduct a de
novo hearing on the matter.’” City of Almaty v. Sater, No. 19 Civ. 2645 (JGK),
2022 WL 1555542, at *2 (S.D.N.Y. May 16, 2022) (quoting In re Hulley Enters.
Ltd., 400 F. Supp. 3d 62, 69 (S.D.N.Y. 2019)).
2.
Motions for Summary Judgment
Under Federal Rule of Civil Procedure 56(a), a “court shall grant
summary judgment if the movant shows that there is no genuine dispute as to
any material fact and the movant is entitled to judgment as a matter of law.”
Fed. R. Civ. P. 56(a); see Vt. Teddy Bear Co. v. 1-800 Beargram Co., 373 F.3d
241, 244 (2d Cir. 2004). 2 A fact is “material” if it “might affect the outcome of
2
The 2010 Amendments to the Federal Rules of Civil Procedure revised the summary
judgment standard from a genuine “issue” of material fact to a genuine “dispute” of
material fact. See Fed. R. Civ. P. 56, advisory comm. notes (2010 Amendments) (noting
that the amendment to “[s]ubdivision (a) ... chang[es] only one word — genuine ‘issue’
becomes genuine ‘dispute.’ ‘Dispute’ better reflects the focus of a summary-judgment
determination.”). This Court uses the post-amendment standard, but continues to be
7
the suit under the governing law,” and is genuinely in dispute “if the evidence
is such that a reasonable jury could return a verdict for the nonmoving party.”
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); accord Jeffreys v.
City of New York, 426 F.3d 549, 553 (2d Cir. 2005).
The moving party bears the initial burden of demonstrating “the absence
of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323
(1986). The movant may discharge its burden by showing that the nonmoving
party has “fail[ed] to make a showing sufficient to establish the existence of an
element essential to that party’s case, and on which that party will bear the
burden of proof at trial.” Id. at 322; see also Selevan v. N.Y. Thruway Auth.,
711 F.3d 253, 256 (2d Cir. 2013) (finding summary judgment appropriate
where the non-moving party failed to “come forth with evidence sufficient to
permit a reasonable juror to return a verdict in his or her favor on an essential
element of a claim” (internal quotation marks omitted)).
If the moving party meets this burden, the nonmoving party must “set
forth specific facts showing that there is a genuine issue for trial” using
affidavits or other materials, but cannot rely on the “mere allegations or
denials” contained in the pleadings. Anderson, 477 U.S. at 248; see also
Wright v. Goord, 554 F.3d 255, 266 (2d Cir. 2009). In other words, the
nonmoving party “must do more than simply show that there is some
metaphysical doubt as to the material facts,” Matsushita Elec. Indus. Co. v.
guided by pre-amendment Supreme Court and Second Circuit precedent that refer to
“genuine issues of material fact.”
8
Zenith Radio Corp., 475 U.S. 574, 586 (1986), and cannot rely on “mere
speculation or conjecture as to the true nature of the facts to overcome a
motion for summary judgment,” Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 12 (2d
Cir. 1986).
“When ruling on a summary judgment motion, the district court must
construe the facts in the light most favorable to the non-moving party and
must resolve all ambiguities and draw all reasonable inferences against the
movant.” Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775, 780 (2d Cir.
2003). In considering “what may reasonably be inferred” from witness
testimony, however, the court should not accord the non-moving party the
benefit of “unreasonable inferences, or inferences at war with undisputed
facts.” Berk v. St. Vincent’s Hosp. & Med. Ctr., 380 F. Supp. 2d 334, 342
(S.D.N.Y. 2005) (citing Cty. of Suffolk v. Long Island Lighting Co., 907 F.2d
1295, 1318 (2d Cir. 1990)). “Put another way, summary judgment is
appropriate only where the record taken as a whole could not lead a rational
trier of fact to find for the non-movant.” Borley v. United States, 22 F.4th 75,
78 (2d Cir. 2021) (internal alterations omitted).
B.
Analysis
Judge Lehrburger’s Report addresses four threshold issues: (i) standing;
(ii) res judicata; (iii) timeliness; and (iv) the sufficiency of Plaintiffs’ evidence as
to their tort claims. Defendant has filed a narrow set of objections to the
Report, challenging Judge Lehrburger’s standing analysis and a limited set of
his findings with respect to res judicata and timeliness. Plaintiffs mount the
9
inverse challenge to the Report, defending the Report’s standing analysis, but
arguing that the balance of its findings and recommendations should be
rejected in their entirety. As explained in greater detail below, the Court
(i) adopts the Report’s recommendation regarding Plaintiffs’ standing;
(ii) adopts the Report’s recommendation regarding issue preclusion; (iii) adopts
in part the Report’s recommendation regarding timeliness; (iv) adopts the
Report’s recommendation regarding Plaintiffs’ tort claims; and (v) adopts the
Report’s findings to which the parties have not objected.
1.
Plaintiffs Have Standing to Pursue Claims Regarding the
Sold Certificates
The Court begins with Defendant’s challenge to the Report’s standing
analysis. By way of background, Defendant had argued in its summary
judgment motion that Plaintiffs lacked standing to pursue claims based on
certificates in six trusts that they sold between 2011 and 2014 (the “Sold
Certificates”). (Report 9). Judge Lehrburger began his analysis by observing
that Plaintiffs’ standing to pursue these claims turned in large measure on the
substantive law governing their sales of the Sold Certificates. (Id.). As Judge
Lehrburger noted and the parties do not dispute, if New York law governed the
sales, then Plaintiffs sold not only the Sold Certificates, but also their legal
claims based on the certificates. (Id.). By contrast, if California law applied to
the sales, then Plaintiffs retained their legal claims even after selling their
ownership interests in the certificates. (Id.). After engaging in a detailed
choice-of-law analysis, Judge Lehrburger found that California law applied to
10
Plaintiffs’ sales of the Sold Certificates and thus that Plaintiffs had standing to
pursue claims based on the certificates. (Id. at 12-28).
In its objections, Defendant argues that Judge Lehrburger misconstrued
controlling provisions of the applicable PSAs, misapplied New York choice-oflaw rules, and ignored this District’s prevailing interpretation of California law
governing securities sales. (Def. Br. 3-11). The Court is unpersuaded by
Defendant’s arguments and concludes that Judge Lehrburger appropriately
found that Plaintiffs have standing to pursue claims based on the Sold
Certificates.
a.
The PSAs Do Not Override the Choice-of-Law Analysis
At the outset, Defendant argues that the Report’s choice-of-law analysis
is ineffectual because the relevant PSAs dictate that New York law applies to
Plaintiffs’ sales of the Sold Certificates. (Def. Br. 3). 3 Defendant’s argument
ostensibly rests on Section 5.02(e)(iii) of the PSAs, which provides that
“ownership and transfers of registration of the Book-Entry Certificates shall be
governed by applicable rules established by the [Deposit Trust Company, or
DTC].” (Id.). 4 In Defendant’s view, Section 5.02(e)(iii) “require[s] that the
consequences of [Plaintiffs’] transfers of the Sold Certificates be determined by
3
As Judge Lehrburger explained in the Report, “[w]hile there is a PSA for each Trust, the
relevant provisions among the PSAs are substantially identical.” (Report 20 n.10).
Judge Lehrburger and Defendant therefore cite to the PSA for the CWALT 2006-32CB
Trust, and the Court does the same here. (See id.; Def. Br. 3).
4
“The DTC is a securities depository based in New York City that is organized as a
limited purpose trust company and provides safekeeping through electronic recordkeeping of securities balances. It also acts as a clearinghouse to process and settle
trades.” Phoenix Light SF Ltd. v. Wells Fargo Bank, N.A., No. 14 Civ. 10102 (KPF) (SN),
2022 WL 2702616, at *14 (S.D.N.Y. July 12, 2022) (internal quotation marks omitted).
11
DTC’s rules.” (Id.). Defendant asserts that DTC’s rules, in turn, dictate that
“all transfers of DTC-registered securities be governed by New York law.” (Id. at
3-4).
Defendant’s latter argument rests on a hodgepodge of DTC’s rules. For
starters, Defendant quotes a provision of DTC’s rules providing that “[t]he
Rules, Procedures and rights and obligations under the By-Laws, the Rules
and the Procedures, shall be governed by, and construed in accordance with,
the laws of the State of New York applicable to contracts executed and
performed therein.” (Def. Br. 3 (quoting Houpt Decl., Ex. 10 § 4)). Next,
Defendant observes that “the DTC Rules cover transactions in securities held
with DTC.” (Id.). Lastly, Defendant quotes from a document authored by DTC
entitled “Disclosure Framework for Covered Clearing Agencies and Financial
Market Infrastructures,” which states that “[t]he relevant jurisdictions for all
material aspects of DTC’s activities are the United States and New York.”
(Houpt Decl., Ex. 9 at 15). Defendant argues that these provisions, read
together, dictate that New York law governs Plaintiffs’ sales of the Sold
Certificates.
Judge Lehrburger considered and rejected this argument in the Report.
Although Judge Lehrburger did not address the issue at length, he began by
questioning whether the DTC provisions on which Defendant relied “say[ ]
anything relevant to” the choice-of-law analysis implicated by Defendant’s
standing argument. (Report 20). Judge Lehrburger then found that the DTC’s
rules were inapplicable in this case because neither Plaintiffs nor their affiliates
12
were DTC participants. (Id.). Based on these findings, Judge Lehrburger
concluded that “DTC’s post-trade involvement in settlement is not dispositive
and does not shift the center of gravity to New York.” (Id.).
The Court finds no error in Judge Lehrburger’s conclusion. In PacLife I,
the Court rejected an argument similar to the one Defendant raises here. See
PacLife I, 2018 WL 1382105, at *16. There, the Court found that while the
PSAs applicable to the Sold Certificates contained New York choice-of-law
provisions, those clauses had “no relevance to the question whether the
contracts of sale ... operated to assign certain rights of action.” Id. (quoting
Semi-Tech Litig., LLC v. Bankers Tr. Co., 272 F. Supp. 2d 319, 330 (S.D.N.Y.
2003)). Defendant’s argument in this case is only one level removed from the
one the Court rejected in PacLife I: rather than rely on the choice-of-law
provisions in the PSAs themselves, Defendant instead looks to the PSA’s
incorporation of DTC’s choice-of-law provisions. What imperils both arguments
is that while Defendant has identified choice-of-law provisions applicable to
certain transactions, it has not shown that these provisions are relevant to “the
separate contracts between buyers and sellers of the certificates.” BlackRock
Balanced Cap. Portfolio (FI) v. Deutsche Bank Nat’l Tr. Co., No. 14 Civ. 9367
(JMF) (SN), 2018 WL 5619957, at *11 (S.D.N.Y. Aug. 7, 2018) (quoting Royal
Park Invs. SA/NV v. HSBC Bank USA, N.A., No. 14 Civ. 8175 (LGS), 2018 WL
679495, at *5 (S.D.N.Y. Feb. 1, 2018)). As in PacLife I, therefore, the Court
finds that the provisions identified in Defendant’s objections are not
determinative of the substantive law applicable to the sale agreements through
13
which Plaintiffs transferred the Sold Certificates. “Instead, that question is
controlled by New York choice of law principles.” Id.
b.
The Center of Gravity Is California
Turning to the heart of the Report’s standing analysis, Defendant argues
that Judge Lehrburger erred in finding that California, not New York, law
applies to Plaintiffs’ sales of the Sold Certificates under New York choice-of-law
rules. (Def. Br. 6). In Defendant’s view, DTC’s role in holding and effectuating
the transfers of the Sold Certificates calls for the application of New York law to
Plaintiffs’ sales of the Sold Certificates. (Id. at 6-10). The Court agrees with
Judge Lehrburger that DTC’s involvement is insufficient to move the center of
gravity from California to New York, and therefore adopts the Report’s finding
that California law governs Plaintiffs’ sales of the Sold Certificates.
The relevant legal standards are not in dispute. As Judge Lehrburger
explained, “New York applies a ‘center of gravity’ or ‘grouping of contacts’ as the
appropriate analytical approach to choice-of-law questions in contract
cases.” (Report 14 (quoting Zurich Ins. Co. v. Shearson Lehman Hutton, Inc., 84
N.Y.2d 309, 317 (1994) (internal quotation marks omitted))). “Under this
approach, the spectrum of significant contacts — rather than a single possibly
fortuitous event — may be considered.” Fireman’s Fund Ins. Co. v. Great Am.
Ins. Co. of New York, 822 F.3d 620, 642 (2d Cir. 2016). The factors to be
considered include: (i) “the places of negotiation and performance”; (ii) “the
location of the subject matter”; and (iii) “the domicile or place of business of the
contracting parties.” Id.; see also Schwartz v. Liberty Mut. Ins. Co., 539 F.3d
14
135, 151-52 (2d Cir. 2008) (same). While the Court considers each of these
factors in its analysis, “[t]he place of contracting and place of performance are
given the greatest weight.” AEI Life LLC v. Lincoln Benefit Life Co., 892 F.3d
126, 135 (2d Cir. 2018) (quoting Forest Park Pictures v. Universal Television
Network, Inc., 683 F.3d 424, 433 (2d Cir. 2012)).
The Court previously addressed the identical choice-of-law issue in
PacLife I, albeit in a different procedural posture. In denying Defendant’s
motion to dismiss for lack of standing, the Court stated that the pleadings
“strongly suggest that California law applies, and that Plaintiffs have standing
to pursue claims relating to the Sold Certificates.” PacLife I, 2018 WL
1382105, at *15. The Court based this observation on the facts that
(i) Plaintiffs’ principal place of business is in California; (ii) PacLife was the
original purchaser for all the Sold Certificates; (iii) PacLife managed its RMBS
portfolio, including the Sold Certificates, from California; (iv) PacLife conducted
all activities in connection with the sales of the Sold Certificates through
employees located in California; (v) the purchasers of the Sold Certificates were
located in California; and (vi) the business records regarding the sale are
located in California. Id. at *16. That said, the Court left the door open for
Defendant to renew its standing argument, “as appropriate, upon discovery of
facts to the contrary.” Id.
Picking up where this Court left off, Judge Lehrburger “again [found] that
the center of gravity related to the Sold Certificates is California.” (Report 15).
Judge Lehrburger began by observing that the “salient facts are undisputed.”
15
(Id.). These facts mirrored those upon which the Court based its decision in
PacLife I: Plaintiffs’ principal place of business is in California; the Sold
Certificates were managed in California; the decision to sell the Sold
Certificates was made by Plaintiffs’ employees in California; and the purchasers
of the Sold Certificates were in California. (Id. at 16). Judge Lehrburger also
considered whether the involvement of DTC in “settling” the purchases of the
Sold Certificates was sufficient to overcome the centrality of California to
Plaintiffs’ sales of the Sold Certificates. (Id. at 17-23). Ultimately, Judge
Lehrburger found that DTC’s role dictated that the place of performance and
the subject matter of the relevant contracts were in New York, but that “all
other factors relevant to the choice-of-law analysis are firmly grounded in
California,” such that California law governed the sales of the Sold Certificates.
(Id. at 23).
Defendant’s current challenges are unpersuasive. First, Defendant
argues that Judge Lehrburger erred by considering that Plaintiffs negotiated
and entered into the sales contracts for the Sold Certificates in California. (Def.
Br. 6). According to Defendant, the place of negotiation and contracting “do
not bear any — let alone a ‘significant’ — relation to the ‘matter in dispute[,]’
which is what rights passed when [Plaintiffs] transferred [their] beneficial
interest in the Sold Certificates on the DTC ledger.” (Id. (internal citations
omitted)). The Court is not persuaded by Defendant’s reframing of the relevant
issue. Contrary to Defendant’s suggestion, the issue presented is whether
Plaintiffs transferred both their ownership interest and their preexisting legal
16
claims in the Sold Certificates at the time of the relevant transactions. As
Judge Lehrburger explained, those transactions occurred prior to DTC’s
subsequent transfer of the certificates from Plaintiffs to the purchasers.
(Report 17-19). And because those transactions occurred in California, Judge
Lehrburger did not err in finding that California law governed the transactions.
(Id. at 23). Indeed, the Court is unaware of any authority supporting
Defendant’s position that all transactions that are ultimately settled through
DTC are governed by New York law. To the contrary, the considerable lengths
to which courts in this District have gone to determine the applicable law in
comparable circumstances suggests that DTC’s role is but one of a
constellation of factors that must be considered in resolving choice of law
issues. See, e.g., Phoenix Light SF Ltd. v. Wells Fargo Bank, N.A., No. 14 Civ.
10102 (KPF) (SN), 2022 WL 2702616, at *14 (S.D.N.Y. July 12, 2022) (“PL/WF”)
(“To be sure, decisions addressing the significance of the DTC’s role in
securities-related cases are not perfectly consistent.” (surveying approaches)).
Second, Defendant challenges Judge Lehrburger’s efforts to distinguish
the present case from Commerzbank AG v. U.S. Bank Nat’l Ass’n, 457 F. Supp.
3d 233 (S.D.N.Y. 2020) (“CB/USB”), and Phoenix Light SF Ltd. v. Wells Fargo
Bank, N.A., No. 14 Civ. 10102 (KPF) (SN), 2021 WL 7082193 (S.D.N.Y. Dec. 6,
2021), report and recommendation adopted in part, rejected in part, PL/WF,
2022 WL 2702616. As set forth in greater detail in the Report, Judge
Lehrburger noted that these decisions both found that New York law governed
similar sales of RMBS certificates based, at least in part, on DTC’s involvement
17
in the transactions. (Report 20-21). Judge Lehrburger found, however, that
CB/USB was inapposite because the decision was based on the application of
Ohio, rather than New York, choice-of-law rules. (Id. at 21-22). And he further
found that PL/WF differed from the instant case in that it involved sales by a
German bank made from its London branch office to purchasers of unknown
domiciles. (Id. at 23). Here, by contrast, Judge Lehrburger found that
Plaintiffs’ “principal place of business is California, the buyers operated out of
California, and all of the pertinent components of contract formation took place
in California.” (Id.).
While the Court does not quibble with Defendant’s contention that
certain of the distinctions drawn in the Report are less persuasive than others,
it ultimately agrees that neither CB/USB nor PL/WF requires the application of
New York law in this case. As it happens, the Court agrees with the defense
that the differences between Ohio and New York choice-of-law rules are too
insubstantial to distinguish this case from CB/USB. (See Def. Br. 8 (observing
that the two tests consider substantially the same factors)). That said, Judge
William H. Pauley, who decided CB/USB, found the difference to be material in
his decision denying a motion for reconsideration. See Commerzbank AG v.
U.S. Bank Nat’l Ass’n, No. 16 Civ. 4569 (WHP), 2021 WL 603045, at *3
(S.D.N.Y. Feb. 16, 2021) (observing that “none of these cases apply Ohio law”).
Further, Judge Pauley noted that, despite their facial similarities, “Ohio follows
the rule that where a conflict of law issue arises in a case involving a contract,
the law of the state where the contract is to be performed governs.” CB/USB,
18
457 F. Supp. 3d at 242 (quoting Gries Sports Enter., Inc. v. Modell, 15 Ohio St.
3d 284, 286 (1984)). New York, by contrast, gives significant weight to both the
place of performance and the place of contracting. See AEI Life LLC, 892 F.3d
at 135. Given these distinctions, the Court agrees with Judge Lehrburger that
CB/USB does not compel the application of New York law.
The Court also concurs with Judge Lehrburger’s finding that PL/WF
involved materially different facts. Among other distinctions, PL/WF involved a
German seller; a failure on the plaintiff’s part to demonstrate that substantial
negotiations took place in London with entities domiciled or with their principal
places of business there; and a plaintiff who traded through a DTC participant.
PL/WF, 2022 WL 2702616, at *15. Precisely for these reasons, this Court
distinguished the instant case in the PL/WF decision:
Despite Commerzbank’s repeated assertion that PacLife
and this case are mirrors of one another, the factual
record in PacLife differs in several critical respects, as
was recognized by Judge Lehrburger in PacLife itself.
To begin, “PacLife’s principal place of business is
California, the buyers operated out of California, and all
of the pertinent components of contract formation took
place in California.” By contrast, Commerzbank is
located in Germany and there is insufficient evidence of
where the Sold Certificates’ ultimate purchasers reside.
Furthermore, Judge Lehrburger deemed relevant the
fact that PacLife (unlike Commerzbank) does not “trade
through any subsidiary entities that were DTC
participants.” “Due to the[se] discernable differences,”
Judge Lehrburger “decline[d] to reach the same
conclusion as” CB/USB or [Judge Netburn’s report and
recommendation].
Id. (internal citations omitted). Notably, in PL/WF, this Court placed less
weight on DTC’s role in securities-related cases than Judge Netburn. Id. at
19
*14. In other words, Judge Lehrburger’s decision to find DTC involvement to
be “relevant but not dispositive” (Report 22 n.15), fully accords with this
Court’s view.
More to the point, nothing in this Court’s PL/WF decision suggests that
because the relevant buyers were located in California bank branches, their
location is irrelevant to the choice of law inquiry. (Def. Br. 8). In PL/WF, the
Court rejected a party’s position that because transactions took place in that
party’s London office, that fact could overtake the importance of the party’s
principal place of business being Germany. PL/WF, 2022 WL 2702616, at
*14. Here, by contrast, Defendant does not engage with Judge Lehrburger’s
deep dive into HSH Nordbank AG v. RBS Holdings USA Inc., No. 13 Civ. 3303
(PGG), 2015 WL 1307189 (S.D.N.Y. Mar. 23, 2015), the decision from which
some courts have derived the rule that branches of an investment bank have
no bearing on choice-of-law analysis. (Report 16-17 n.6). Had it done so,
Defendant would have recognized the basic point that the case concerns
determining residency in the context of New York’s borrowing statute for
statutes of limitations, rather than the center of gravity test for choice of law.
Id. at *5. This Court agrees with Judge Lehrburger that even if the buyers’
relevant places of business cannot be deemed “principal,” the fact that the
negotiation and execution of the purchases of the Sold Certificates occurred in
California on the buyers’ ends should be considered. (Report 16-17). In any
event, because Plaintiffs’ principal place of business was in California; the
buyers had places of business involved in the relevant transactions in
20
California; the contracting, negotiation, and performance of the sales occurred
in California; and the subject matter of the contracts (other than DTC
involvement) leans toward California, the center of gravity is, on the whole,
California. This would be true even if the buyers’ principal places of business
were elsewhere. It should be no surprise, then, that the Court agrees fully
with Judge Lehrburger’s implementation of the center of gravity test in the
Report. California law applies to the sales of the Sold Certificates.
c.
California Law Affords Plaintiffs Standing
Defendant raises one challenge to Judge Lehrburger’s interpretation of
California law, concerning California Commercial Code Section 8302(a), which
provides that “a purchaser of a certificated or uncertificated security acquires
all rights in the security that the transferor had or had power to transfer.”
(Def. Br. 10 (quoting Cal. Com. Code § 8302(a)). Judge Lehrburger found that
this provision of California law “does not apply to issues arising from contracts
for the purchase or sale of securities but instead only to those concerning the
settlement phase of securities transactions.” (Report 27). Defendant argues
that this finding was erroneous because “this Court has held Article 8 does
‘deal[ ] with the mechanisms by which interests in securities are transferred,’
which is precisely the issue here — what interests transferred upon sale.” (Def.
Br. 10 (quoting Petroleos de Venezuela S.A. v. MUFG Union Bank, N.A., 495 F.
Supp. 3d 257, 284 (S.D.N.Y. 2020) (“PdVSA”))).
Defendant identifies no error in Judge Lehrburger’s analysis. As Judge
Lehrburger noted in the Report, Defendant does not cite to a decision by a
21
California court addressing Article 8 in comparable circumstances. (Report
27). Instead, Defendant points to certain general comments on Article 8 made
by this Court in PdVSA, 495 F. Supp. 3d at 284, and by Judge John G. Koeltl
in Consolidated Edison, Inc. v. Northeast Utilities, 318 F. Supp. 2d 181, 183
(S.D.N.Y. 2004) (“Con Edison”), rev’d in part, 426 F.3d 524 (2d Cir. 2005). (Def.
Br. 10-11; Def. Reply 9). Neither of these decisions supports Defendant’s
argument. To be sure, Judge Koeltl observed in Con Edison that Article 8
“involves the mechanism for transferring rights and applies primarily to
disputes over the quality of title and the competing ownership rights passed
from transferor to transferee.” (Def. Reply 9 (quoting Con Edison, 318 F. Supp.
2d at 188)). But he further explained that Article 8-302 “does not define ‘rights
in a security’ or codify a rule assigning to purchasers any claim accrued while
possessing the security.” Con Edison, 318 F. Supp. 2d at 189. Thus, the
“provision simply provides that whatever ‘rights in the security’ are, they are
automatically transferred to a purchaser.” Id. at 190. In other words, Article 8
principally concerns what Judge Lehrburger found, i.e., the settlement phase of
securities transactions, not the trade of securities, and certainly not every
securities-related contract issue. (Report 27-28 & n.19).
This Court’s decision in PdVSA is entirely in accord. 495 F. Supp. 3d at
284-85 (discussing the “narrow view of the Article’s scope,” including that “[it]
does not deal with the process of entering into contracts for the transfer of
securities or regulate the rights and duties of those involved in the contracting
process” (quoting Prefatory Note to Article 8 at III.B (1994))). Defendant
22
seemingly overlooks this Court’s statements in PdVSA that to read Article 8 as
broadly as Defendant now seeks “would swallow any choice of law analysis
involving the formation of a contract for securities.” Id. at 285; see also id. at
284 (“Article 8 deals with the settlement phase of securities transactions[.]”).
Article 8 does not control here, and it does not affect Plaintiffs’ standing.
Defendant has not raised any other challenges to Plaintiffs’ standing
under California law. Having rejected Defendant’s objections to Judge
Lehrburger’s choice of law and standing analysis, this Court adopts the
Report’s recommendations on these points and finds that Plaintiffs have
standing to raise claims regarding the Sold Certificates.
2.
The Article 77 Proceeding and Judgment Preclude Many of
Plaintiffs’ Claims
Judge Lehrburger ultimately found that the bulk of Plaintiffs’ claims were
barred by operation of the doctrines of claim and issue preclusion due to the
Article 77 proceeding approving Defendant’s settlement with Countrywide.
(Report 28-51). Plaintiffs object to these findings, and raise myriad challenges
to each step of Judge Lehrburger’s analysis. As discussed herein, this Court
adopts Judge Lehrburger’s (arguably) narrower finding that issue preclusion
(i.e., collateral estoppel) bars the claims discussed in the Report. This is so
because the Article 77 proceeding necessarily found that Defendant fulfilled “its
obligations to certificateholders in resolving the Countrywide loan problems”;
that settling claims was preferable to enforcing remedies, including repurchase
obligations; and that such issues lie at the core of Plaintiffs’ instant theories
23
concerning pre-Settlement breaches of contract, fiduciary duties, and
negligence. (Id. at 41-42). 5
a.
Applicable Law
“Traditionally, the doctrine of res judicata, or claim preclusion, provides
that ‘a final judgment on the merits of an action precludes the parties or their
privies from relitigating issues that were or could have been raised in that
action.’” Burgos v. Hopkins, 14 F.3d 787, 789 (2d Cir. 1994) (quoting Allen v.
McCurry, 449 U.S. 90, 94 (1980)). On the other hand, “the very similar but
distinct doctrine of collateral estoppel, which is also known as issue, rather
than claim, preclusion” “‘may preclude relitigation of [an issue of fact or law
necessary to a prior judgment] in a suit on a different cause of action involving
a party to the first case.’” Id. (quoting Allen, 449 U.S. at 94). “It is settled law
‘that a federal court must give to a state-court judgment the same preclusive
effect as would be given that judgment under the law of the State in which the
5
The Court focuses on issue preclusion in light of certain formal barriers to Plaintiffs
asserting breach of contract claims (among others) against Defendant in the Article 77
proceeding. (Pl. Reply 3-4). As explained infra in the text, the nature of the proceeding
was such that Plaintiffs (as well as other parties) could not pursue claims against
Defendant directly for any alleged wrongdoing. But such barriers do not mean that
issues decided in the Article 77 proceeding cannot be afforded issue-preclusive effect.
For example, in Parker v. Blauvelt Volunteer Fire Co., the New York Court of Appeals
found that an Article 78 proceeding could not be afforded claim-preclusive effect
because the Article 78 court severed certain claims and thus could not afford the
plaintiff the relevant relief sought in a follow-on Section 1983 case (i.e., money damages
as opposed to restoration of employment as a firefighter). 93 N.Y.2d 343, 348 (1999).
Even then, the Court of Appeals found the Section 1983 claims barred by issue
preclusion, because “[t]he dispositive factual and legal issues in plaintiff’s claims of
deprivation of his constitutional rights in this 42 USC § 1983 civil rights action are
identical to the allegations of constitutional violations asserted as a basis for annulment
of defendant’s disciplinary determinations, decided against plaintiff in the prior CPLR
article 78 proceeding.” Id. at 350. As the Court discusses in the text, that basic point
applies here.
24
judgment was rendered.’” PacLife I, 2018 WL 1382105, at *11 (quoting Migra v.
Warren City Sch. Dist. Bd. of Educ., 465 U.S. 75, 81 (1984)). “That means this
Court ‘must use the res judicata doctrine of’ New York to determine whether
Plaintiffs are precluded from suing Defendant.” Id. (quoting Logan v.
Maveevskii, 175 F. Supp. 3d 209, 233 (S.D.N.Y. 2016)).
i.
Res Judicata or Claim Preclusion
“New York State law … has adopted a transactional approach to res
judicata, barring a later claim arising out of the same factual grouping as an
earlier litigated claim even if the later claim is based on different legal theories
or seeks dissimilar or additional relief.” Burgos, 14 F.3d at 790 (citing Smith v.
Russell Sage College, 54 N.Y.2d 185, 192-93 (1981)); see also, e.g., Ferris v.
Cuevas, 118 F.3d 122, 126 (2d Cir. 1997) (“We thus treat the claim at bar as
being the ‘same’ claim as the prior state action because it arises from the same
set of facts and seeks the same remedy, despite the different legal theory
advanced.”). As a result, the New York Court of Appeals has described New
York’s doctrine as “arguably broader than the principles adopted by the federal
courts.” Ins. Co. of State of Pennsylvania v. HSBC Bank USA, 10 N.Y.3d 32, 38
n.3 (2008).
A party invoking res judicata must show that “[i] the previous action
involved an adjudication on the merits; [ii] the previous action involved the
plaintiffs or those in privity with them; and [iii] the claims asserted in the
subsequent action were, or could have been, raised in the prior action.”
25
Monahan v. N.Y.C. Dep’t of Corr., 214 F.3d 275, 285 (2d Cir. 2000) (citations
omitted). Importantly, however,
[t]his bar against later claims based upon the same
cause of action is … subject to certain limitations, one
of which is that it will not be applied if the initial forum
did not have the power to award the full measure of
relief sought in the later litigation. Where formal
barriers to asserting a claim existed in the first forum it
would be unfair to preclude [the plaintiff] from a second
action in which he can present those phases of the
claim which he was disabled from presenting in the
first.
Davidson v. Capuano, 792 F.2d 275, 278 (2d Cir. 1986) (internal citations and
quotation marks omitted).
ii.
Collateral Estoppel or Issue Preclusion
“Under New York law, the doctrine of collateral estoppel ‘precludes a
party from relitigating in a subsequent action or proceeding an issue clearly
raised in a prior action or proceeding and decided against that party or those in
privity, whether or not the tribunals or causes of action are the same.’”
Burgos, 14 F.3d at 792 (quoting Ryan v. N.Y. Tel. Co., 62 N.Y.2d 494, 500
(1984)). “The equitable doctrine of collateral estoppel is grounded in the facts
and realities of a particular litigation, rather than rigid rules.” Buechel v. Bain,
97 N.Y.2d 295, 303 (2001). “[C]ollateral estoppel bars relitigation of an issue
when [i] the identical issue necessarily was decided in the prior action and is
decisive of the present action, and [ii] the party to be precluded from relitigating
the issue had a full and fair opportunity to litigate the issue in the prior
action.” Evans v. Ottimo, 469 F.3d 278, 281 (2d Cir. 2006) (citing Kaufman v.
Eli Lilly & Co., 65 N.Y.2d 449, 455-56 (1985) (citations omitted)). Still, because
26
the doctrine is a “flexible one,” “the enumeration of these elements is intended
merely as a framework, not a substitute, for case-by-case analysis of the facts
and realities.” Buechel, 97 N.Y.2d at 304; see also Staatsburg Water Co. v.
Staatsburg Fire Dist., 72 N.Y.2d 147, 153 (1988) (“In the end, the fundamental
inquiry is whether relitigation should be permitted in a particular case in light
of what are often competing policy considerations, including fairness to the
parties, conservation of the resources of the court and the litigants, and the
societal interests in consistent and accurate results. No rigid rules are
possible, because even these factors may vary in relative importance depending
on the nature of the proceedings.” (internal citations omitted)).
b.
Judge Lehrburger Properly Found an Identity of Issues 6
A critical piece of Judge Lehrburger’s analysis — and one that merits
unpacking — is his finding that the Article 77 proceeding and this case present
an identity of claims or issues. (Report 37-42). The Report finds preclusion
appropriate because (i) many of the issues or claims that Plaintiffs assert here
could have been or in fact were addressed in the Article 77 proceeding; (ii) the
Article 77 judgment approved of Defendant’s actions in releasing claims against
Countrywide, which actions are the same failures Plaintiffs seek to hold
Defendant liable for here; (iii) the Article 77 court necessarily rejected
arguments that Defendant should have pursued rights and remedies against
Countrywide in a different manner; (iv) Defendant’s actions in handling
6
In this part of the Court’s analysis, it references Judge Lehrburger’s findings pertaining
to identity of issues made in both his claim preclusion and issue preclusion
discussions.
27
breaches were at issue, because the Article 77 court effectively blessed the
Settlement as a means to resolve Countrywide’s breaches; and (v) to find that
the Article 77 proceeding does not bar many of the instant claims would allow
Plaintiffs an end-run around the judicially-approved Settlement. (Id.).
Plaintiffs object to this characterization of the Article 77 proceeding and,
by extension, its effect on their instant claims. Distilled down, Plaintiffs’
objections are that (i) they could not have and did not assert contract claims in
the Article 77 proceeding; and (ii) this case concerns different issues — namely,
Defendant’s alleged breaches rather than approval of Defendant’s discretion to
settle with Countrywide. (Pl. Br. 4-6 (“As the New York courts held, under the
deferential standard of an Article 77 Proceeding, [Defendant] was authorized to
make the Settlement. That does not begin to address, however, whether
[Defendant] breached its contractual obligations to these certificateholders
under these PSAs by forgoing putting loans back to Countrywide, bringing suit
to enforce repurchase if needed, and failing to prudently exercise all of its
rights and remedies after EODs.”); Pl. Reply 3-4 (“The Article 77 Proceeding
decided whether [Defendant] had discretion to settle. This case decides a
different question: did [Defendant] breach its contractual duties?”)). Plaintiffs’
arguments are not persuasive, and the Court adopts Judge Lehrburger’s
analysis.
Resolving Plaintiffs’ objections requires some explanation of the
Article 77 proceeding. As relevant here, on June 28, 2011, Defendant and
Countrywide entered into an $8.5 billion settlement that sought to resolve any
28
claims that Defendant, acting as trustee, might have against Countrywide.
(See Settlement ¶¶ 3, 9-12). The Settlement released Countrywide from:
all alleged or actual claims … alleged Events of Default,
damages, rights and causes of action of any kind or
nature whatsoever … in contract, tort, or otherwise …
that the Precluded Persons may now or may hereafter
have against any or all of the [Countrywide parties]
arising out of or relating to (i) the origination, sale, or
delivery of Mortgage Loans to the Covered Trusts,
including the representations and warranties in
connection with the origination, sale, or delivery of
Mortgage Loans to the Covered Trusts or any alleged
obligation of any [Countrywide party] to repurchase or
otherwise compensate the Covered Trusts for any
Mortgage Loan on the basis of any representations or
warranties or otherwise or failure to cure any alleged
breaches of representations and warranties, including
all claims arising in any way from or under Section 2.03
(“Representations, Warranties and Covenants of the
Sellers and Master Servicer”) of the Governing
Agreements, (ii) the documentation of the Mortgage
Loans held by the Covered Trusts (including the
documents and instruments covered in Sections 2.01
(“Conveyance of Mortgage Loans”) and 2.02
(“Acceptance by the Trustee of the Mortgage Loans”) of
the Governing Agreements and the Mortgage Files
including with respect to alleged defective, incomplete,
or non-existent documentation, as well as issues arising
out of or relating to recordation, title, assignment, or
any other matter relating to legal enforceability of a
Mortgage or Mortgage Note, and (iii) the servicing of the
Mortgage Loans held by the Covered Trusts (including
any claim relating to the timing of collection efforts or
foreclosure efforts, loss mitigation, transfers to
subservicers, Advances, Servicing Advances, or that
servicing includes an obligation to take any action or
provide any notice towards or with respect to, the
possible repurchase of Mortgage Loans by the Master
Services, Seller, or any other Person), in all cases prior
to or after the Approval Date (collectively, all such
claims being defines as the “Trust Released Claims”).
29
(Settlement ¶ 9(a)). Additionally, the Settlement allowed Defendant and
Countrywide to chart a new path forward for their ongoing relationship.
Specifically, Defendant agreed not to take any action against Countrywide
related to the subject matter of the Settlement:
Absent direction from the Settlement Court in
accordance with the next sentence below, between the
Signing Date and the Approval Date (or such time as
Final Court Approval becomes legally impossible), the
Trustee covenants that it will not take any action with
respect to any Covered Trust that is intended or
reasonably could be expected to be adverse to or
inconsistent with the intent, terms, and conditions of
the Settlement and this Agreement, and will not
commence or assist in the commencement of any
litigation based upon any of the claims subject to the
release and waiver in Paragraph 9.
(Id. ¶ 15(a)). Flowing from this covenant, the parties also agreed that
If after the Signing Date and before the Settlement
Payment is made, any [Countrywide party] either
(i) repurchases any Mortgage Loan(s) from any Covered
Trust(s) or (ii) makes any make-whole payment with
respect to any such Mortgage Loan(s) to any Covered
Trust(s) … the Settlement Payment … shall be reduced
dollar-for-dollar by the economic benefit to the Covered
Trust(s)
of
such
repurchase
or
make-whole
payment(s)[.]
(Id. ¶ 15(b)).
In order for the Settlement to be approved and to be binding on all
relevant parties, Defendant commenced a special proceeding pursuant to
Article 77 of the New York CPLR. The parties do not generally object to Judge
Lehrburger’s recitation of the factual and procedural histories of the Article 77
proceeding, including its appeal. (See Report 28-31). See generally In re Bank
of New York Mellon, 986 N.Y.S.2d 864 (Table), 2014 WL 1057187 (N.Y. Sup. Ct.
30
Jan. 31, 2014) (“Mellon I”); In re Bank of New York Mellon, 4 N.Y.S.3d 204 (1st
Dep’t 2015) (“Mellon II”).
Moving away from the Article 77 proceeding for a moment, the Court
considers Plaintiffs’ claims in this action, which claims it has analyzed in both
PacLife I and PacLife II. Neither party disputes this Court’s categorization of
four basic at-issue duties allegedly imposed on Defendant under the PSAs,
from which Plaintiffs’ allegations of breaches flow:
7
First, Defendant owed certain duties associated with
taking possession of all relevant mortgage loan
documents, and assigning back to the seller incomplete
loans for substitution. PacLife I, 2018 WL 1382105, at
*2. After this process was complete, Defendant was
required to issue a final certification with an exception
report for any deficient mortgages, and demand that
such defects be cured. Id.
Second, Defendant was to provide notice of defaults and
enforce repurchase obligations as defined in the PSAs.
Id. at *3. These notices of defaults were premised on
certain representations and warranties (“R&W”)
regarding the mortgage loans. Id. After providing
notice, the seller was obligated to cure the breach or
remove the faulty loan from the trust. Id.
Third, upon the occurrence of an Event of Default
(“EOD”), Defendant was to “exercise such of the rights
and powers vested in it by this Agreement, and use the
same degree of care and skill in their exercise as a
prudent
person
would
exercise
under
the
circumstances in the conduct of such person’s own
affairs.” Id. This included providing public notice of
uncured EODs, and Plaintiffs contend that Defendant
was obligated to, inter alia, enforce repurchase
obligations. Id. 7
As a sister court aptly summarized with respect to materially similar PSAs, “[t]he
nomenclature of ‘pre’ and ‘post-’ EOD captures only the point in time that a duty arises.
[A trustee’s] pre-EOD obligations bind [it] whether or not an EOD actually occurs. And
those pre-EOD obligations do not cease if and when an EOD does occur. Rather, after
31
Fourth and finally, Defendant had a duty to address the
servicer’s failure to meet prudent servicing standards.
Id. at *4.
Discovery has further clarified Plaintiffs’ claims and their theories of
harm. Plaintiffs do not dispute Judge Lehrburger’s basic premise that many of
their core claims here are that Defendant “breached various duties by failing to
provide notice of and enforce remedies for Countrywide’s failures.” (Report 55;
see also, e.g., Houpt Decl., Ex. 57 at 32-34 (Plaintiffs’ interrogatory responses)
(cataloging claimed EODs premised on, inter alia, document defects and
servicing issues, and noting that following EODs, Defendant “could have
fulfilled [its duty of prudence] in several ways, such as exercising the remedy of
putting back loans with R&W breaches and document defects, requesting that
the Master Servicer fulfill its obligations under the governing agreements, and
bringing lawsuits against [the] Master Servicer to recover losses incurred by the
Covered Trusts as a result of the Master Servicer’s misconduct, among
others”)). Although Plaintiffs explicitly disavow direct challenges to the
Settlement or the Article 77 court’s approval of it, their principal manner of
distinguishing the instant proceeding from a collateral attack on the Article 77
judgment (or its findings) is to assert that this is an action against Defendant
for failing to take different action with respect to released claims. (See, e.g. Pl.
Br. 6 (“Plaintiffs do not challenge the Settlement or [Defendant] having made
it…. That does not begin to address, however, whether [Defendant] breached
an EOD occurs, [the trustee] is bound by both its pre- and post-EOD obligations.”
Ambac Assurance Corp. v. U.S. Bank Nat’l Ass’n, No. 17 Civ. 2614 (PAE) (KHP), 2022 WL
4621431, at *4 (S.D.N.Y. Sept. 30, 2022).
32
its contractual obligations to these certificateholders under these PSAs by
forgoing putting loans back to Countrywide, bringing suit to enforce
repurchase if needed, and failing to prudently exercise all of its rights and
remedies after EODs.”)).
Plaintiffs’ expert, Christopher Milner, corroborated Judge Lehrburger’s
general characterization of many of Plaintiffs’ claims. For example, Milner
catalogs Plaintiffs’ claims as (i) mortgage file breaches; (ii) R&W breaches;
(iii) modification breaches; (iv) servicing breaches; and (v) Defendant’s failure to
exercise rights and duties as a prudent person would following claimed EODs.
(Milner Report ¶¶ 3-7). In calculating damages, Milner sought to determine
how much more money Plaintiffs would have received had Defendant
([i]) taken steps to ensure the repurchase of Mortgage
Loans with Mortgage File Breaches; ([ii]) taken steps to
ensure the repurchase of Mortgage Loans with R&W
Breaches; ([iii]) taken steps to ensure the repurchase of
Mortgage Loans with Modification Breaches; and
([iv]) taken steps to ensure that the Master Servicer
adhered to Prudent Servicing Standards to address
Servicing Breaches.
(Id. ¶ 8; see also id. ¶¶ 14-17 (summarizing opinions)). As Judge Lehrburger
astutely noted in analyzing Plaintiffs’ expert discovery, Plaintiffs’ “primary
damages scenario” assumes the non-existence of the Settlement and
Defendant’s enforcement of contractual duties against Countrywide without
litigation, as well as alternative scenarios of enforcement through litigation.
(Report 41). As a result, Plaintiffs’ expert’s model and the Article 77 judgment
and Settlement cannot co-exist.
33
Once Plaintiffs’ claims are properly contextualized, it becomes clear that
there is an identity of issues between the Article 77 proceeding and many of
Plaintiffs’ claims. Though Plaintiffs take care to couch their arguments under
the rubric of claims not resolved through the Article 77 proceeding (e.g., breach
of contract), their theories still impugn the Article 77 court’s findings or depend
on arguments that were necessarily rejected by the Article 77 court. Judge
Lehrburger underscored this point by cataloging the arguments and issues
with which the Article 77 court was presented and which it necessarily decided,
many of which arose from objectors in situations analogous to Plaintiffs’. (See
Report 37-39). For example, objector Public Pension Fund Committee argued
against approval of the Settlement on bases that included the following:
“[Defendant] had full ‘prudent person’ obligations to
protect [R]MBS holders’ repurchase rights under the
terms of the PSA…. Thus, [Defendant] had good reason
to seek a quiet extra-judicial settlement, in lieu of a high
profile lawsuit with full discovery that would shed
unwelcome light on [its] own misconduct[.]”
“What are the Alternatives to Settlement?’ [T]he answer
is that [R]MBS investors can sue [Defendant] for its
refusal to perform as their fiduciary … including for
their losses caused by [its] failure to institute suit to
enforce the repurchase rights, and vigorously advocate
for [R]MBS holders’ interests.”
Defendant would have fulfilled its
investigating and pursuing repurchases.
duties
by
(Houpt Decl., Ex. 88 at 9, 11, 13 (internal quotation marks and citations
omitted)). The Retirement Board of the Policemen’s Annuity & Benefit Fund
and other pension fund objectors made similar arguments on appeal. (See id.,
Ex. 89 at 23-26 (arguing that Defendant should have committed to enforcing
34
repurchase rights), 39 (raising due process arguments concerning release of
claims of certificateholders without consent, including arguing under Taylor v.
Sturgell, discussed infra)).
The Article 77 court (and later, the Appellate Division) reached its
ultimate conclusion — that Defendant “did not abuse its discretion in entering
into the Settlement Agreement and did not act in bad faith or outside the
bounds of reasonable judgment,” Mellon I, 2014 WL 1057187, at *20 — by
rejecting the objectors’ arguments. In so doing, the Article 77 court necessarily
passed on the conduct at issue here: whether Defendant’s actions with respect
to the released claims were in the certificateholders’ best interests, and
whether releasing such claims fulfilled Defendant’s duties to certificateholders.
Id. That is, the Article 77 court blessed Defendant’s decision not to pursue
alternative means of enforcing rights and remedies against Countrywide and
instead to settle potential claims against these entities for substantial
consideration paid out to certificateholders. Plaintiffs’ theories of breach are
directly contrary to these findings; they fault Defendant for not investigating
various types of breaches, and they tether alleged harms to Defendant’s failure
to enforce the PSAs’ remedies, whether through litigation or something short of
it. As such, to accept Plaintiffs’ theories, this Court would need to reject the
Settlement and the Article 77 judgment and find that Defendant was obligated
to take a different approach. See, e.g., Mellon II, 4 N.Y.S.3d at 209 (“It is also
worth noting that it would have been unreasonable to decline to enter into the
settlement with the expectation of obtaining a much greater judgment after
35
years of litigation, while knowing that attempts to enforce such a judgment
would likely result in the actual collection of a lesser sum than that offered in
the proposed settlement.”).
Plaintiffs get no mileage out of arguing mirror-image issues — rejected by
New York courts — under new guises. (See Report 39-40 (noting that
Defendant’s “resolution of Countrywide’s breaches with respect to loans
backing the Trusts” was directly at issue in the Article 77 proceeding, and that
the Article 77 proceeding “resolved [Defendant’s] obligations to Trust
certificateholders in resolving and releasing claims against Countrywide”)). As
Judge Lehrburger found, the PSAs gave Defendant the ability to compromise
claims where doing so would be in the best interests of certificateholders. (See
PSA § 8.02(iii) (stating that Defendant “shall not be liable for any action taken,
suffered[,] or omitted by it in good faith and believed by it to be authorized or
within the discretion or rights or powers conferred upon it by this Agreement)).
Likewise, the Article 77 court found that taking the actions for which Plaintiffs
seek to hold Defendant liable now would not make sense with the Settlement
on the table. Just as Judge Lehrburger noted with respect to claim preclusion
(Report 32-33), issue preclusion is similarly not amenable to “rigid rules,” but
instead must be considered “in light of what are often competing policy
considerations, including fairness to the parties, conservation of the resources
of the court and the litigants, and the societal interests in consistent and
accurate results.” Staatsburg Water Co., 72 N.Y.2d at 153. Certainly, avoiding
a scenario where Defendant is faulted for obtaining $8.5 billion for
36
certificateholders through a proceeding intensely supervised by New York
courts that rejected Plaintiffs’ arguments calls for application of a totality of the
circumstances approach.
For these reasons, the Court rejects Plaintiffs’ primary contention that
their inability to assert breach of contract claims in the Article 77 proceeding
vitiates its preclusive effect. As discussed, that Plaintiffs could not have
asserted breach of contract claims against Defendant may counsel in favor of
hesitation in applying claim preclusion. See Davidson, 792 F.2d at 278. But
that emphatically does not mean that the Article 77 court’s findings have no
legal bearing on this case, where Plaintiffs have put Defendant’s conduct —
necessarily passed upon in the Article 77 proceeding — directly at issue. See
Parker, 93 N.Y.2d at 350. Judge Lehrburger properly found that Plaintiffs had
an opportunity to raise the arguments that Defendant should have enforced
rights and remedies against Countrywide in the Article 77 proceeding. (Report
38). Though Plaintiffs elected not to take that opportunity, as discussed infra,
other objecting parties clearly made those exact arguments.
Finally, Plaintiffs’ principal exhibit for why preclusion is inappropriate
here — a May 20, 2013 oral argument transcript concerning motion practice on
a jury demand in the Article 77 proceeding — actually undermines their
position. Plaintiffs are correct that the Article 77 court stated that the
proceeding was not a breach of contract case. (Pl. Br. 5). But more important
than that one statement is what the parties to the proceeding, including
37
Defendant and objectors, maintained was necessary to get judicial approval of
the Settlement at this same hearing:
“[F]or this court to make those findings, you will have to
make a decision as to whether or not the trustee
breached its obligations under the governing
agreements, under the PSA’s. Did they breach that
contract or not?” (Kane Decl., Ex. 31 at 17:4-9).
“[J]ust like you would do in a malpractice case involving
a doctor, in a car collision, the facts are done. The
question becomes what do they mean[?] Did they
breach their obligations under the pooling and servicing
agreements? Did they violate their fiduciary duties[?]
Did they fail to meet the standard of care that is
imposed upon them, meaning the trustee, by accepting
their responsibilities under the governing agreements?”
(Id. at 19:26-20:9).
And the Article 77 court itself, while noting that the proceeding was not a
breach of contract case, recognized that it would necessarily resolve contested
facts relevant to such claims, even if the proceeding remained equitable in
nature:
“I never saw a case that said just because you might
come in and bring that [future] case, because those
[claims] are being extinguished, that gives you a right to
a jury trial on issues in this case. I find that sort of a
contorted argument. (Id. at 26:9-13).
“This case is not a case for breach of contract, that’s not
what it is…. I understand that they are asking for
judicial findings, including whether or not the trustee
in any way breached the trust. But that doesn’t turn
this into a case for — does not turn this into a breach
of contract case or a case for negligence or a case for
breach of fiduciary duty.” (Id. at 53:24-54:10)
It is undisputed that the Article 77 proceeding was not a breach of
contract case, and that a jury was not required to resolve contested facts. But
38
this says nothing about whether the proceeding addressed the same issues this
Court must now consider. As Judge Lehrburger found, the Article 77 court
had to address the same issues at the core of Plaintiffs’ theories concerning
pre-Settlement claims. (See Report 38). To find otherwise would risk entirely
inconsistent judgments related to the same conduct.
c.
Judge Lehrburger Properly Determined the Burden of
Proof
Plaintiffs next attack Judge Lehrburger’s analysis of the relevant burden
of proof. In essence, Plaintiffs suggest that Judge Lehrburger erred by not
taking into account the fact that the Article 77 court assessed Defendant’s
conduct under an abuse of discretion standard, whereas here “Plaintiffs must
prove their case by a mere preponderance of the evidence.” (Pl. Br. 3). The
Court disagrees.
At the outset, Plaintiffs are mistaken that Judge Lehrburger somehow
overlooked this issue. To the contrary, he accurately discussed the Article 77
court’s findings: that Defendant was within its discretion to settle the claims
against Countrywide, and that it did not abuse that discretion. (Report 30-31).
See Mellon I, 2014 WL 1057187, at *20 (“After reviewing the voluminous record
and carefully considering the arguments presented by all counsel, this Court
finds that, except for the finding below regarding the loan modification claims,
the Trustee did not abuse its discretion in entering into the Settlement
Agreement and did not act in bad faith or outside the bounds of reasonable
judgment.”).
39
Moreover, Plaintiffs appear to conflate a procedural issue — burden —
with the substance of the Article 77 proceeding — namely, interpretation of the
PSAs, whether Defendant was entitled to act as it did, and whether the
Settlement was in the best interests of certificateholders. The New York
Supreme Court did not conjure up the abuse of discretion standard out of thin
air; rather, it derived that standard from the PSAs themselves. Mellon I, 2014
WL 1057187, at *9 (finding abuse of discretion review appropriate because
“[u]nder the Governing Agreements, the Trustee holds all right, title and
interest in the mortgage loans for the benefit of the Certificateholders,” and
that such “provision effectively grants the Trustee the power and authority to
commence litigation” and likewise “the power to settle litigation”). The Article
77 court then relied on trust law and trust principles to flesh out precisely
what was involved in determining an abuse of discretion, and what its review of
the Settlement would entail. Id. As both Defendant and Judge Lehrburger
point out, this standard also derives from Section 8.02(iii) of the PSAs, which
states that “the Trustee shall not be liable for any action taken, suffered or
omitted by it in good faith and believed to be authorized or within the
discretion or rights or powers conferred upon it by this Agreement.” (Report 40
(quoting PSA § 8.02(iii) (internal quotation marks omitted))). 8
8
In a separate Article 77 proceeding concerning another RMBS trust settlement, the New
York State Supreme Court likened the proceeding to one for summary judgment. See In
re U.S. Bank Nat’l Ass’n, 27 N.Y.S.3d 797, 800 (N.Y. Sup. Ct. 2015) (“Section 409(b)
makes clear that the special proceeding is to be adjudicated in the same manner as a
motion for summary judgment. Thus, if the papers fail to raise a triable issue of fact,
the court is to grant judgment as a matter of law in favor of the appropriate party. If a
40
Even taking their argument at face value, Plaintiffs fail to articulate
what, exactly, their burden of proof was in the Article 77 proceeding. As
Defendant notes, preclusion is inappropriate where “[t]he party against whom
preclusion is sought had a significantly heavier burden of persuasion with
respect to the issue in the initial action than in the subsequent action.”
RESTATEMENT (SECOND) OF JUDGMENTS § 28(4) (1982). But the “abuse of
discretion” burden was Defendant’s alone to bear in the Article 77 proceeding,
and it is indeed unclear whether intervening parties had to prove anything.
Stated differently, the Court agrees with Defendant’s general observations that
“[e]ven if this Court found, somehow, that the respondents had some burden, it
could not have been any heavier than the preponderance of the evidence
standard that [Plaintiffs] must meet here.” (Def. Opp. 6). For these reasons,
the Court is not persuaded by Plaintiffs’ citations to cases reciting the general
rule that differing burdens of proof may call for denying preclusive effect to
prior judgments.
Further, as discussed above, Judge Lehrburger was correct to compare
Plaintiffs’ claims discussed in his preclusion analysis to challenges to the
Settlement (or, at a minimum, relitigation of issues resolved by the Settlement).
Plaintiffs are free to argue that they are not challenging Defendant’s decision to
enter into the Settlement, but instead holding Defendant to its contractual and
fiduciary obligations. At the motion to dismiss stage, this argument is
triable issue of fact is raised, reference must be made to CPLR 410, which requires that
any such issues be tried forthwith.” (internal citations and quotation marks omitted)).
41
precisely the one this Court entertained in denying preclusive effect to the
Article 77 judgment. But to the extent Plaintiffs’ claims necessarily impugn
Defendant’s actions in settling Countrywide’s errors or omissions, they are
barred based on both Section 8.02(iii) of the PSAs and the Article 77 resolution.
(See Report 40 (“[Defendant] negotiated and entered into the Settlement to hold
Countrywide accountable for breaches under the governing agreements,
whether related to repurchase obligations, R&W breaches, document defect
breaches, or servicing breaches…. And it is [Defendant’s] actions in entering
into the Settlement and compromising claims on behalf of the Trusts that the
Article 77 court blessed as having been made in ‘good faith’ and ‘within its
discretion.’” (quoting Mellon I, 2014 WL 1057187, at *4))).
Once the issue is framed properly, Plaintiffs’ burden of proof argument —
even if accepted — is of no moment. In his preclusion analysis, Judge
Lehrburger considered two New York cases that gave preclusive effect to the
Article 77 proceeding: In re Bank of New York Mellon, 51 N.Y.S.3d 356 (N.Y.
Sup. Ct. 2017), 9 and Commerce Bank v. Bank of New York Mellon, 35 N.Y.S.3d
63 (1st Dep’t 2016). Plaintiffs rightly note that these cases concerned direct
challenges to the Settlement, and thus are distinguishable. (Pl. Br. 16-17).
Indeed, in Commerce Bank, the Appellate Division found the plaintiff’s claim
that Defendant was negligent and/or breached its duties to “analyz[e] and
evaluat[e] the Loan Modification Claims in negotiating the greatest value
9
As the name implies, this case is a follow-on from the Article 77 proceeding, and
concerns distribution of proceeds from the Settlement.
42
possible for such claims in any attempted settlement,” Complaint ¶ 188(g),
Commerce Bank v. Bank of New York Mellon, No. 651967/2014, 2015 WL
5770467 (N.Y. Sup. Ct. Oct. 2, 2015), NYSECF No. 2, to be precluded by its
approval of the Settlement, Com. Bank, 35 N.Y.S.3d at 66 (“To the extent the
Commerce Bank complaint alleges that defendant breached its fiduciary duty
with respect to loan modification claims, that claim is precluded by our
approval of the settlement and our declaration that there is no indication that
[Defendant] was acting in self-interest or in the interests of [Countrywide]
rather than those of the certificateholders when it entered into the
[S]ettlement.” (quoting Mellon II, 4 N.Y.S.3d at 208) (internal quotation marks
and citations omitted)). Likewise, the 2017 Mellon case found that a party
objecting to distribution of Settlement proceeds was barred from relitigating the
issue, because the party “had a full and fair opportunity to raise its objection to
the Settlement Agreement’s terms in the prior proceeding[.]” In re Bank of New
York Mellon, 51 N.Y.S.3d at 361-62. 10
10
To be clear, the caselaw discussing whether preclusion is warranted in the wake of an
Article 77 proceeding is decidedly mixed. For example, the parties offer diametrically
opposed views of then-District Judge Amy J. St. Eve’s opinion in Sterling Federal Bank,
F.S.B. v. Countrywide Financial Corp.. No. 11 Civ. 2012 (AJS), 2012 WL 2368821 (N.D.
Ill. June 21, 2012). In that case, the court stayed, pending resolution of an Article 77
proceeding in New York State court, breach of fiduciary duty claims against Defendant
for, inter alia, “failing to investigate the Master Servicer’s nonperformance of its
obligations under the PSAs, after [Defendant] had actual knowledge of an Event of
Default, and by failing to make demands on the Master Servicer and suing if the
demands were not met.” Id. at *9, 16. The court reached this result by reasoning that
“the issue of whether [Defendant] acted in accordance with its obligations under the
PSAs and state law in investigating and choosing to settle claims against the Master
Servicer and the Seller, rather than litigating those claims, is directly present in both
proceedings.” Id. at *11. At the same time, the court allowed breach of contract claims
to proceed, although it did not explain why those claims should not be similarly stayed
pending the Article 77 proceeding. See id. at *20-21. More recently, a New York court
found that similar breach claims premised on document defects were not barred by res
43
Plaintiffs overstate the centrality of these two cases to Judge
Lehrburger’s analysis. But as it happens, discovery has confirmed that these
cases actually support issue preclusion as to Plaintiffs’ core contention: that
Defendant was obligated to enforce Countrywide’s duties or otherwise litigate
breaches as opposed to settle them. Plaintiffs’ basis for casting these cases
aside — that they were direct challenges to the Settlement — accordingly does
not withstand scrutiny. First, as discussed, this Court agrees with Judge
Lehrburger’s general view, confirmed by Plaintiffs’ expert and interrogatory
responses, that many of the claims here predicated on pre-Settlement conduct
are different in degree, but not in kind. Mellon I found that Defendant had the
discretion and authority to enter into the Settlement, and more importantly
that Defendant “did not abuse its discretion in entering into the Settlement
Agreement and did not act in bad faith or outside the bounds of reasonable
judgment.” Mellon I, 2014 WL 1057187, at *20. Mellon II echoed the point.
See Mellon II, 4 N.Y.S.3d at 209 (“It is also worth noting that it would have been
unreasonable to decline to enter into the settlement with the expectation of
obtaining a much greater judgment after years of litigation, while knowing that
judicata. Zittman v. Bank of N.Y. Mellon, No. 650599/2022 (AB), 2023 WL 2895171, *3
(N.Y. Sup. Ct. Apr. 11, 2023). In so holding at the motion to dismiss stage, the court
relied heavily on this Court’s findings concerning preclusion in PacLife I. Id. at *1, 4.
As discussed throughout this Opinion, discovery has conclusively demonstrated that
issues integral to Plaintiffs’ claims concerning pre-Settlement breaches and conduct
were necessarily passed on in the Article 77 proceeding and, further, that Plaintiffs’
claims are inconsistent with that judgment. This is a fact-specific inquiry, and one that
shows preclusion is warranted based on Plaintiffs’ present theories.
44
attempts to enforce such a judgment would likely result in the actual collection
of a lesser sum than that offered in the proposed settlement.”).
Second, once many of Plaintiffs’ claims are understood as arguing
against the decision to settle, the burden of proof issue disappears. Judge
Lehrburger did not miss Plaintiffs’ objection on this point. Rather, as
discussed above, he found it appropriate — and this Court agrees — to not
allow Plaintiffs to pursue claims that rely on contravention of the Article 77
findings. (Report 37). Commerce Bank found that the plaintiff, in a separate
case under the same preponderance standard here, was barred from arguing
that Defendant had breached fiduciary duties by settling the loan modification
claims. Com. Bank, 35 N.Y.S.3d at 65-66. Once one brushes aside the labels
on claims (see Report 41-42 (“[I]ssue preclusion would bar relitigation of the
primary issue in dispute: whether [Defendant], as Trustee, fulfilled its
obligations to certificateholders in resolving Countrywide’s breaching loans,
repurchase obligation, events of default, and servicing failures.”)), it becomes
clear that the findings from the Article 77 proceeding are entitled to no less
preclusive effect here than they merited in Commerce Bank. See, e.g., Parker,
93 N.Y.2d at 350 (finding issue preclusion bars claim where prior Article 78
proceeding adjudicated “the very same legal and factual issues … that now
form the basis of [the] current action”). This would be true even if Plaintiffs
were correct on the burden issue.
45
d.
Plaintiffs Are Subject to Preclusion as “Parties”
Plaintiffs alternatively contend that the Article 77 findings cannot be
afforded preclusive effect because they were not parties to the Article 77
proceeding. As noted above, both claim preclusion and issue preclusion
require an identity of parties. See Burgos, 14 F.3d at 792; Monahan, 214 F.3d
at 285. Judge Lehrburger found that Plaintiffs could be considered parties to
the Article 77 proceeding — in other words, that they “had a full and fair
opportunity” to litigate the issues decided there — because they were given
notice of the proceeding, and had the opportunity to litigate the same issues
there as here. (Report 35-38). In objecting to this finding, Plaintiffs raise two
arguments: (i) Plaintiffs cannot be bound by the Article 77 findings because
they did not actually appear; and (ii) Supreme Court precedent forecloses
preclusion in any event. (Pl. Br. 6-10, 18-20). Both contentions fail.
Plaintiffs’ first argument misperceives the law of preclusion generally,
and the manner in which Plaintiffs were bound by the Article 77 proceeding
specifically. Plaintiffs do not contest that they were served with notice of the
proceeding and were allowed to object. (See Report 35-36; Pl. Counter 56.1
¶¶ 42-43). See Mellon I, 2014 WL 1057187, at *8 (“By Order to Show Cause
signed on June 29, 2011, this Court ordered that notice of the commencement
of this special proceeding be disseminated to all Potentially Interested Persons
within forty-five (45) days via nine different domestic and international
methods or channels of communication.” (internal citations omitted)); id.
(discussing objection procedure)). Nor can Plaintiffs object to the fact that the
46
notice of the Article 77 proceeding sent to certificateholders clearly stated that
“[t]he Settlement, if approved by the Court, will affect the rights and interests of
all Certificateholders,” and that “anyone who fails to object … shall be deemed
to have waived the right to object … and shall be forever barred from raising
such objection before the Court or in any other action or proceeding[.]” (Houpt
Decl., Ex. 27). Indeed, the Article 77 proceeding was contested — if not fully
adversarial — because many parties did object to Defendant’s decision to enter
into the Settlement, for reasons this Court has already discussed. See Mellon I,
2014 WL 1057187, at *10 (“The [r]espondents contend that the Trustee acted
in bad faith and unreasonably both in its actions while the Settlement was
being negotiated and in accepting the terms of the Settlement and the amount
of the Settlement Payment.”); Mellon II, 4 N.Y.S.3d at 207 (discussing the
objecting parties’ claims, including that “some of the [o]bjectors specifically
argued that the seller or servicer of the Trusts’ loans had breached their
obligation under the PSAs to repurchase modified loans from the Trusts, and
that the settlement improperly releases those claims without the necessary
scrutiny or assessment of their value”).
After receipt and review of more than 1,000 documents; consideration of
expert witness submissions; and testimony from twenty-two witnesses over the
course of thirty-six days, the Article 77 court made its decision to approve the
Settlement and reject the objectors’ contentions. (Pl. Counter 56.1 ¶¶ 44-47).
In so doing, the Article 77 court found that “a full and fair opportunity has
been offered to all Potentially Interested Persons, including the Trust
47
Beneficiaries, to make their views known to the Court, to object to the
Settlement and to the approval of the actions of the Trustee in entering into the
Settlement Agreement, and to participate in the hearing thereon.” Mellon I,
2014 WL 1057187, at *8. That Plaintiffs did not avail themselves of this
opportunity does not mean they cannot be bound by the Article 77 findings.
How else could res judicata bar the plaintiff’s relitigation of issues and claims
necessarily decided in the Settlement in Commerce Bank? In essence, Plaintiffs
are rejecting the notion that issues necessarily decided in the Article 77
proceeding — that Defendant had the discretion to enter into the Settlement,
that the Settlement was in certificateholders’ best interests, and that it was
preferable to settle rather than to enforce Countrywide’s duties — bear on their
claims here. Their rejection, however, defies both the record and the law.
Neither Taylor v. Sturgell, 553 U.S. 880 (2008), nor Chase National Bank
v. Norwalk, 291 U.S. 431 (1934), saves Plaintiffs’ argument. Quite to the
contrary, Plaintiffs’ invocation of these cases misses the foundational premise
of the Report that the Article 77 court and the Appellate Division made findings
necessary to approve the Settlement that preclude Plaintiffs’ current claims.
Plaintiffs are bound by the Article 77 proceeding; indeed, they do not (and
cannot) contest this basic point. Thus, to the extent the findings and judgment
from the Article 77 proceeding bind Plaintiffs — as they would in a direct
challenge to the Settlement — so too do they bind Plaintiffs here.
Judge Lehrburger was correct to distinguish Taylor on the basis that the
case concerned the theory of “virtual representation” and the federal law of
48
preclusion. (Report 36-37 (noting, for instance, that New York preclusion law
is arguably broader than federal law)). See Taylor, 553 U.S. at 892 (“A person
who was not a party to a suit generally has not had a ‘full and fair opportunity
to litigate’ the claims and issues settled in that suit.”). 11 Taylor accordingly
concerned nonparty preclusion, and discussed six exceptions to the rule
against it. Taylor, 553 U.S. at 893-96. These exceptions do not matter here;
Mellon I recognized that every interested party had an opportunity to
participate and was afforded a full and fair opportunity to raise objections.
Mellon I, 2014 WL 1057187, at *8. That Plaintiffs forwent this opportunity does
not mean that they were not parties to the Article 77 proceeding or bound by
its findings. 12 As above, the logic of Commerce Bank does not depend on
formal appearance or nonappearance: the plaintiff there was subject to res
judicata because it was directly attacking the Settlement and Article 77
11
Plaintiffs are incorrect that Taylor overrides state preclusion law. Though of course due
process emanates from the Constitution, the Court does not read Taylor to state that
only its recognized exceptions are consistent with constitutional protections. Indeed,
Taylor expressly limits itself to the federal common law of preclusion. See Taylor v.
Sturgell, 553 U.S. 880, 904 (2008) (“The preclusive effects of a judgment in a federalquestion case decided by a federal court should instead be determined according to the
established grounds for nonparty preclusion described in this opinion.”); see also, e.g.,
Burton v. Am. Cyanamid Co., 588 F. Supp. 3d 890, 908 n.12 (E.D. Wis. 2022) (“[T]his
case is based on diversity and therefore is governed by Wisconsin’s preclusion
principles. The plaintiffs have not cited, and I have not found, any Wisconsin cases
indicating that the Wisconsin Supreme Court would abandon the ‘sufficient identity of
interest’ test in light of Taylor.”). Moreover, as discussed in this Opinion, parties to the
Article 77 proceeding raised due process challenges to the binding effect of the resulting
judgment based on Taylor. Plaintiffs cannot meaningfully suggest that the Article 77
court transgressed constitutional limits in binding certificateholders to the judgment.
12
For similar reasons, the Court is not persuaded by Plaintiffs’ appeal to Chase National
Bank, 291 U.S. 431 (1934). (Pl. Br. 7). That case stands for the basic proposition that
a nonparty who fails to voluntarily intervene in a suit “to which he is a stranger” is not
bound by the suit. Chase, 291 U.S. at 441. As above, Plaintiffs were far from strangers
in the Article 77 proceeding.
49
judgment. Plaintiffs are functionally doing the same here, and cannot advance
contrary theories under new claims. If Plaintiffs are bound by the Article 77
judgment, they are likewise bound by its findings. Once this point is
understood, the remainder of Plaintiffs’ objections on this issue fall away.
In any event, affording preclusive effect to the Article 77 proceeding with
respect to the party/nonparty distinction is consistent with the purposes of the
Article 77 mechanism. Indeed, it is consistent with Taylor and with the
arguably broader New York law of preclusion. As the Second Circuit described
the Article 77 mechanism in a case involving the very proceeding at issue here,
“[s]uch proceedings are used by trustees to obtain instruction as to whether a
future course of conduct is proper, and by trustees (and beneficiaries) to obtain
interpretations of the meaning of trust documents.” BlackRock Fin. Mgmt. Inc.
v. Segregated Acct. of Ambac Assur. Corp., 673 F.3d 169, 174 (2d Cir. 2012);
see also id. at 177 (“Thus [Defendant] asks for a construction of the PSA and
an instruction that its planned course of action complies with its obligations
under that document and the law of trusts — consistent with other
proceedings brought under Article 77.”). 13 In so determining these issues, the
Article 77 proceeding “concern[ed] the relationship between the entity which
administers the securities, [Defendant], and the certificateholders.” Id. at 178.
13
As discussed by the Report and by Defendant, BlackRock indicates an identity of issues
between this case and the Article 77 proceeding, one that has been confirmed by
discovery in this case. BlackRock Fin. Mgmt. Inc. v. Segregated Acct. of Ambac Assur.
Corp., 673 F.3d 169, 178 (2d Cir. 2012) (“Because [Defendant] seeks a construction of
its rights under the PSA and an instruction from the court as to whether it has
complied with its ‘duties ... and obligations’ arising from the PSA and its ‘fiduciary
duties’ superimposed by state law, we conclude that [the case must be remanded.]”).
50
This is precisely the point of Article 77. See 4E N.Y. PRAC., COM. LITIG. IN NEW
YORK STATE COURTS § 113:45 (5th ed.) (“In any event, while it is useful to have a
procedural hook for the resolution of trust matters, it is not clear that much
turns on the characterization of a case as an Article 77 proceeding. The key
substantive features are the ability of any beneficiary to be heard and the
power of the court to bind all beneficiaries.” (emphasis added)). To allow
Plaintiffs to escape the preclusive effect of the Article 77 court’s findings made
in approving the Settlement would confound Article 77’s purpose and
undermine its power to bind all beneficiaries, regardless of appearance.
Thus, even assuming the nonparty issue exists, the Court agrees with
Judge Lehrburger and Defendant that Article 77 effectively presents one of the
“statutory scheme[s]” foreclosing relitigation of issues necessarily decided.
Taylor, 553 U.S. at 895. Plaintiffs advance a narrow reading of both Taylor’s
import on this point and the text of Article 77. In essence, they contend that
because Article 77 “does not say successive litigation by nonlitigants is
foreclosed,” Defendant cannot avail itself of this Taylor exception. (Pl. Br. 8-9).
But Taylor refers not to the plain text of a “statute” on this point, but rather a
“statutory scheme.” Article 77 plainly states that “[a] special proceeding may
be brought to determine a matter relating to any express trust[.]” N.Y. C.P.L.R.
§ 7701 (emphasis added). And the Article 77 proceeding emanated from this
statutory scheme, which empowered the Article 77 court to warn all
certificateholders explicitly that they would be bound by the proceeding and
resulting judgment. See supra. This scheme allowed the Article 77 court to
51
bind all certificateholders, whether or not they appeared. See Com. Bank, 35
N.Y.S.3d at 66 (invoking res judicata to preclude beneficiary’s claim challenging
the Settlement). This statutory scheme thus expressly put certificateholders on
notice that their rights would be affected by the proceeding and judgment.
In this respect, the Court fully adopts Judge Lehrburger’s likening of the
Article 77 proceeding to the Minnesota trust instruction proceeding (“TIP”)
discussed in the report and recommendation in PL/WF, 2021 WL 7082193.
(Report 22-23). There, Judge Sarah Netburn found that Minnesota court
orders approving a settlement entered into by the trustee on behalf of
certificateholders relieved the trustee of repurchase-related obligations and
likewise barred claims dependent upon the same. PL/WF, 2021 WL 7082193,
at *16. Relying on the text of the TIP statute and three Minnesota rules of
preclusive effect, Judge Netburn cast aside the plaintiffs’ contention, similar to
that argued by Plaintiffs here, that the mere fact that the claims were brought
against the trustee denied the TIP orders preclusive effect. Id. at *18 (“Plaintiffs
identify the wrong issue: it is Wells Fargo’s duty to enforce repurchase
obligations that was before the TIP courts, the same duty Plaintiffs allege in
this litigation.”). This Court subsequently adopted Judge Netburn’s analysis.
PL/WF, 2022 WL 2702616, at *21 (“Plaintiffs have failed to explain how the
Report’s findings transgress these constitutional limits. The Report found only
that Plaintiffs were bound to the TIPs orders’ resolution of Wells Fargo’s duty to
enforce repurchase obligations, which is the exact intangible property at issue
52
that Plaintiffs identify in their briefing before this Court.” (internal quotation
marks and citations omitted)).
To be sure, the Minnesota TIP statute is more explicit than Article 77.
See Minn. Stat. Ann. § 501C.0204 (noting that for in rem proceedings “[t]he
order is binding … upon the interests of all beneficiaries,” and that for in
personam proceedings it is “binding on … a party who is served with notice of
the judicial proceeding”). (See Pl. Br. 9-10). But Judge Lehrburger took this
difference in scope into account. (Report 44 & n. 27). This Court agrees that
based on the purpose of Article 77, and the notices, orders, and ultimate
judgment that flowed from the statutory scheme, Plaintiffs were on express
notice that relitigation of issues decided in that proceeding would be precluded.
Regardless, it bears repeating that Taylor concerned federal law, whereas this
Court must apply New York law. It would not make sense for New York to have
the Article 77 procedure — one that effectively gathers all beneficiaries in the
same room and binds them to an outcome — if New York courts then failed to
afford an Article 77 judgment (and those issues necessarily decided in
rendering that judgment) preclusive effect. The Commerce Bank decision
makes that point.
Preclusion in this instance is also consistent with basic principles of
trust law. In the Report, Judge Lehrburger drew guidance from Mullane v.
Central Hanover Bank & Trust Co., 339 U.S. 306 (1950). (See Report 35).
Mullane concerned New York’s Banking Law Section 100-c, but more broadly
recognized the state’s interest in organizing trust affairs and allowing special
53
proceedings to bind beneficiaries. And it was in giving effect to those interests
that the Supreme Court stated:
It is sufficient to observe that, whatever the technical
definition of its chosen procedure, the interest of each
state in providing means to close trusts that exist by the
grace of its laws and are administered under the
supervision of its courts is so insistent and rooted in
custom as to establish beyond doubt the right of its
courts to determine the interests of all claimants,
resident or nonresident, provided its procedure accords
full
opportunity
to
appear
and
be
heard.
Id. at 313. Thus, a state may, consistent with due process and its own state
law, “cut off their rights to have the trustee answer for negligent or illegal
impairments of their interests.” Id. 14
The Article 77 proceeding fulfilled the same purpose as the statute at
issue in Mullane. To the extent Plaintiffs’ one objection to Judge Lehrburger’s
reliance on Mullane is that New York Banking Law Section 100-c calls for
appointment of a guardian ad litem, this Court, like Judge Lehrburger, is not
convinced that such fact deprives the Article 77 judgment of preclusive effect.
14
The Court accepts the parties’ view that the statute at issue in Mullane was not a
predecessor statute to Article 77, and thus to the extent the Report adopted Defendant’s
assertion on this point, it was in error. (Def. Opp. 12 n.4). That the Report mentions
this in passing does not affect its analysis, and the Court agrees with Judge
Lehrburger’s decision to seek guidance from a similar statutory scheme. Further,
Plaintiffs object to the citation to Mullane because the statute at issue calls for
representation by a guardian ad litem for non-appearing parties. Of course, Judge
Lehrburger did not cite Mullane to discuss Taylor or the like. That would not make
sense — Mullane preceded Taylor by some fifty years. Rather, he cited it for the basic
point that state trust regimes are special and play an important role in adjudicating the
rights of myriad beneficiaries, whether those beneficiaries appear or not. Again,
Plaintiffs do not contest that if they were to challenge the Settlement directly, the Article
77 proceeding would be afforded preclusive effect. That is true regardless of their party
or nonparty status to the proceeding. Thus, Plaintiffs’ objection boils down to
recharacterizing their claims here from the claims adjudicated in the Article 77
proceeding.
54
(Pl. Br. 9-10). The Article 77 proceeding gave “express advance notice to nonappearing interested persons” that they would be bound. (Id.). This Court sees
no reason to give less credit to the Article 77 court’s findings in a collateral
attack on the judicially-approved Settlement (or at least a challenge to the
judgment’s basic foundations) than a New York court would give to the Article
77 court’s findings in a direct challenge to the Settlement. 15
e.
Collateral Estoppel and Law of the Case Do Not Prevent
Defendant From Arguing in Favor of Preclusion
Plaintiffs’ final challenge to the Report’s preclusion findings flips the
script: Rather than argue that the Article 77 judgment has no preclusive effect,
Plaintiffs contend that Defendant is barred by operation of collateral estoppel.
To understand Plaintiffs’ argument, a bit of context is necessary. As part
of the Article 77 proceeding, Defendant offered a proposed judgment for the
Article 77 court to consider. The Article 77 court rejected certain of
Defendant’s proposed findings, including findings “(p)” and “(q),” which in
essence would have “permanently barred and enjoined” beneficiaries from
commencing actions against Defendant based on actions related to the
Settlement or “the actions of [Defendant] in entering into the Settlement
Agreement or this Article 77 proceeding.” Mellon I, 2014 WL 1057187, at *5.
15
Plaintiffs also object to Judge Lehrburger’s invocation of another Taylor exception
concerning judgments where a party was “adequately represented by someone with the
same interests who was a party to the suit.” Taylor, 553 U.S. at 894 (internal citations,
quotation marks, and alteration omitted). As one example of such scenario, Taylor
discusses “suits brought by trustees, guardians, and other fiduciaries[.]” Id. The Court
largely agrees with Judge Lehrburger that this exception is likely applicable here, too,
because Defendant represented beneficiaries while also being adverse to objectors’
claims. (Report 36 n.24). Regardless, it does not appear that Judge Lehrburger relied
on this exception in rendering his decision.
55
Rather than adopt any of Defendant’s proposed findings, the Article 77 court
found it appropriate to “adopt[] some of the factual findings, in whole or in
part, in the context of discussing particular issues.” Id. at *6 n.5. In a brief
submitted in connection with Defendant’s opposition to converting the Article
77 proceeding to a plenary action, Defendant justified including its proposed
findings, including the ones discussed above, because the Article 77 court was
free to consider “the res judicata effect of the resulting judgment.” (Kane Decl.,
Ex. 27 at 10).
Judge Lehrburger properly rejected Plaintiffs’ argument. Based on the
plain words of the proposed findings, these provisions concern an anti-suit
injunction, and not the res judicata effect of the Article 77 court’s judgment.
(Report 47-48). An anti-suit injunction “may be needed to protect the court’s
jurisdiction once a judgment has been entered,” where, for example, a court
has doubts that a foreign tribunal will afford preclusive effect to a prior
judgment. Paramedics Electromedicina Comercial, Ltda. v. GE Med. Sys. Info.
Techs., Inc., 369 F.3d 645, 654 (2d Cir. 2004). But “[t]he doctrine of res
judicata, where applied, may obviate injunctive relief against re-litigation in a
second forum.” Id. This Court does not read the Article 77 court’s rejection of
Defendant’s anti-suit injunction as saying anything about res judicata;
perhaps, contrary to Plaintiffs’ argument, the court was confident that such
provisions were unnecessary.
More basically, nothing in Mellon I or Mellon II discusses the future res
judicata effect of the Article 77 judgment. This makes sense — “[o]rdinarily
56
both issue preclusion and claim preclusion are enforced by awaiting a second
action in which they are pleaded and proved by the party asserting them. The
first court does not get to dictate to other courts the preclusion consequences
of its own judgment[.]” Covanta Onondaga Ltd. v. Onondaga Cnty. Res.
Recovery Agency, 318 F.3d 392, 397-98 (2d Cir. 2003) (quoting 18 CHARLES
ALAN WRIGHT, ARTHUR R. MILLER & EDWARD H. COOPER, FEDERAL PRACTICE AND
PROCEDURE: JURISDICTION § 4405, at 82 (2d ed. 2002) (internal quotation marks
omitted)).
What is more, nothing in these bar provisions was necessary to the
Article 77 court rendering its decision that Defendant did not abuse its
discretion or that the Settlement was in the beneficiaries’ best interests; rather,
these provisions would have been a preemptive strike by Defendant, allowing it
to nip future lawsuits in the bud. The Court will not read one ambiguous
statement from Defendant’s brief made in the context of a non-dispositive
motion to stand for the extraordinary proposition that the Article 77 court’s
judgment has no res judicata effect. Again, New York courts have already given
the judgment such effect. See generally Com. Bank, 35 N.Y.S.3d 63. In sum,
this Court fully adopts Judge Lehrburger’s rejection of Plaintiffs’ collateral
estoppel argument.
In a similar vein, this Court agrees with Judge Lehrburger that an Ohio
decision does not preclude Defendant from invoking preclusion here.
(Report 48). In Western and Southern Life Insurance Company v. The Bank of
New York Mellon, an Ohio court rejected Defendant’s argument that the Article
57
77 judgment precluded claims similar to those made here. No. A1302490,
2017 WL 3392856, at *6 (Ohio Ct. Com. Pl. Aug. 4, 2017). The court
explained:
As I read the statute and the court case, the defendant
secured a great deal of money from Countrywide and its
successor Bank of America for bad acts committed by
Countrywide. I can find nothing where the defendant
has paid for bad acts alleged to have been committed by
it.
I have never seen a document releasing the defendant
from any liability from its actions as trustee in these
trusts. The money in the settlement was paid by Bank
of America not the defendant. As noted above, given
that I have found that the defendant is entitled to
judgment in this case in any and every way this case is
analyzed, the Article 77 settlement is a moot point.
Id. Of course, as Judge Lehrburger noted, by its own terms this section of the
court’s decision is dicta (Report 49), inasmuch as the court had already ruled
in Defendant’s favor on all issues. See, e.g., In re Bean, 252 F.3d 113, 118 (2d
Cir. 2001) (“The sua sponte finding of abuse of discretion was pure dicta; it was
not necessary to decide the issue before the district court on appeal from the
bankruptcy court. As such, the finding of abuse of discretion cannot have any
collateral estoppel effect.”). Further, the Court agrees with Judge Lehrburger
that the Ohio court appears to have confused the issue of release as to
Defendant (of which there is none) with the res judicata effect of the Article 77
judgment (which required detailed findings regarding Defendant’s conduct).
(Report 49).
Finally, a word is in order on law of the case and this Court’s prior
decisions in this case. As the parties are aware, this Court previously rejected
58
Defendant’s invocation of preclusion premised on the Article 77 proceeding
twice: once in its motion to dismiss decision, and once in its decision on
Defendant’s motion for reconsideration of that decision. PacLife I, 2018 WL
1382105, at *11-12; PacLife II, 2018 WL 1871174, at *1. In denying
Defendant’s preclusion argument in PacLife I, the Court focused principally on
identity of issues:
[T]he Court is unpersuaded that the Countrywide
Settlement and the Article 77 proceeding preclude
Plaintiffs’ claims. Plaintiffs here allege injuries over and
above whatever injuries were directly caused by
Countrywide and its successor, Bank of America, and
whatever injuries may have been covered by the
Countrywide Settlement.
And they assert claims
against Defendant not for the Trustee’s conduct in
negotiating and executing the Settlement Agreement,
and not for Countrywide’s own misconduct, but rather
for the Trustee’s conduct in performing its substantive
duties under the PSA. Plaintiffs’ claims were not
extinguished by the Countrywide Settlement, and the
damages sought are distinct from those for which
Plaintiffs have recovered. Critically, the present action
pertains to conduct not directly at issue in the
Countrywide Settlement; accordingly, the facts
necessary for Plaintiffs to substantiate their claims are
distinct from those that were relevant to the
Countrywide Settlement. There, it was Countrywide’s
conduct that was primarily at issue. Here, by contrast,
Defendant’s own performance under the PSA is
squarely at issue.
PacLife I, 2018 WL 1382105, at *12. At the time this Court rendered these
decisions, it relied only on judicially noticed documents from the Article 77
proceeding, the Article 77 decisions, and the Complaint. What this Court could
not have known — and what Judge Lehrburger properly found — is that
59
Plaintiffs’ theories necessarily attack the foundations of the Article 77 judgment
necessary to approve the Settlement. Discovery has shown this to be the case.
To be clear, the law of preclusion would not bar claims for breaches of
contract or fiduciary duty that do not rely on theories at odds with the Article
77 court’s findings. In this respect, Defendant has the correct view of this
Court’s prior decisions. (Def. Opp. 16 (“It is possible that a plaintiff could
assert claims against [Defendant] that are not based on the alleged failure of
[Defendant] to prosecute breaches by Countrywide … and this Court’s prior
ruling, we believe, meant only that the complaint here could be read as
asserting such claims.”)). But having reviewed the wealth of discovery
produced in this case as well as the Report, the Court agrees with Defendant’s
position that Plaintiffs’ core theories of breach — that Defendant “breached its
contractual obligations to … certificateholders under these PSAs by forgoing
putting loans back to Countrywide, bringing suit to enforce repurchases if
needed, and failing to prudently exercise all of its rights and remedies after
EODs” — were resolved by the findings the Article 77 court made and the
arguments it rejected on its way to approving the Settlement. (Pl. Br. 6; Def.
Opp. 14).
In conclusion, the Court adopts Judge Lehrburger’s finding that issue
preclusion bars pre-Settlement claims. (Report 41-42, 51). 16 The Court briefly
16
In their objections, Plaintiffs contend that claims involving the re-securitization trust
(referred to as the “Re-Sec Trust”) cannot be barred, because the Article 77 proceeding
concerned only the 13 RMBS trusts, not the Re-Sec Trust. (Pl. Br. 5 n.3). In point of
fact, the Re-Sec Trust is backed by certificates in the RMBS trusts. (Dkt. #246
(Plaintiffs’ memorandum of law in support of its cross-motion for summary judgment) at
17). Thus, all of the relevant rights and duties for the Re-Sec Trust flowed directly from
60
notes that the latter half of Defendant’s objections to the Report seek to expand
Judge Lehrburger’s preclusion analysis to effectively encompass all of Plaintiffs’
claims. (Def. Br. 11-16). As relevant here, Judge Lehrburger found that claims
post-dating the Settlement — including certain servicing claims — were not
precluded, because “at least some of [Plaintiffs’] post-Settlement servicing
claims are based on Countrywide admissions of events of default made in
reports and attestations received by [Defendant], as Trustee, on a yearly basis,
including reports filed year-end 2012 to 2015.” (Report 50-51; see also Def.
Br. 12-15 (explaining that under Judge Lehrburger’s approach, Plaintiffs could
still pursue post-Settlement servicing claims and post-Settlement EOD
claims)). Plaintiffs, unsurprisingly, object to Defendant’s arguments on these
points. (See Pl. Opp. 11-19).
Defendant’s objection invites consideration of a whole host of issues that
are not clearly addressed by the parties in the underlying summary judgment
briefing and that are subject to a fair amount of ambiguity concerning
Plaintiffs’ servicing expert’s opinion and interpretation of the post-servicing
standards set by the Settlement. Because this Court is referring this case back
to Judge Lehrburger for proceedings consistent with the instant Opinion, it
sees no reason to go beyond Judge Lehrburger’s explicit preclusion findings at
an RMBS trust. Plaintiffs do not respond to Defendant’s argument that Plaintiffs’ “only
claims on the Re-Sec Trust are that its trustee should have (somehow) prosecuted
claims that belonged to the underlying RMBS trusts, both of which were part of the
Settlement and Article 77 proceeding.” (Def. Opp. 9 n.3). In sum, the Court agrees that
the Re-Sec Trust’s claims are equally subject to preclusion.
61
this juncture. (See Def. Br. 16 (“[T]his Court could refer the motion back to
Judge Lehrburger for confirmation[.])).
3.
Many of Plaintiffs’ Claims Are Also Untimely 17
The Court now turns to the parties’ objections to the Report’s findings
regarding the timeliness vel non of Plaintiffs’ claims. Judge Lehrburger began
this portion of the Report by finding that Plaintiffs’ claims were required to be
timely under both New York and California law. (Report 51-54). From there,
Judge Lehrburger found that many of Plaintiffs’ claims had accrued at the date
of the Settlement, and thus that a significant portion of the claims were
untimely. (Id. at 54-65). Lastly, Judge Lehrburger rejected Plaintiffs’
arguments related to continuing duties, the California discovery rule, and
equitable estoppel. (Id. at 65-77). Judge Lehrburger also found, however, that
17
This section focuses on the more extensive objections to the Report’s timeliness analysis
proffered by Plaintiffs. However, Defendant also partially objects, insofar as it seeks an
expansion of the Report’s reasoning to bar — as a matter of either res judicata or
statute of limitations — all of Plaintiffs’ claims. Neither Defendant nor Plaintiffs object
to Judge Lehrburger’s alternative findings pertaining to the timeliness of the R&W
breaches, and finding no clear error, the Court adopts that portion of the Report.
(Report 64-65). As previously noted, the Court sees no reason at this juncture to accept
Defendant’s invitation to go beyond the Report’s recommendations on contested issues
of timeliness.
Defendant also objects to one issue associated with specific time bars for certain claims.
Judge Lehrburger adopted a chart prepared by Defendant for purposes of assessing the
timeliness of certain claims. (Def. Br. 16). That chart incorporated eight months of
American Pipe tolling to accrual of contract claims, such that a contract claim that had
accrued by June 23, 2012, would be timely. (Report 54). In their objection, Defendant
clarifies that it erred in preparing this chart, because the Retirement Board class action
triggering American Pipe tolling only applied to these trusts until April 2012. (Def.
Br. 16). See generally American Pipe & Const. Co. v. Utah, 414 U.S. 538 (1974).
Consequently, Defendant seeks correction of the relevant cut-off date, to find that the
California statute of limitations bars claims that accrued before February 23, 2013.
(Id.). Plaintiffs chide Defendant for this mistake. (Pl. Opp. 20). But they make no
actual argument that Defendant’s position is incorrect, because it is not. Given the
Court’s disposition of the timeliness issues, it finds the putative chart error to be
immaterial at this juncture.
62
certain of Plaintiffs’ claims fell outside the scope of Defendant’s motion and
thus were timely. (Id. at 77-78). The Court discusses each of these findings,
and the parties’ objections thereto, in turn.
a.
New York’s Borrowing Statute
Plaintiffs first object to Judge Lehrburger’s statute of limitations findings
concerning New York’s borrowing statute. (Pl. Br. 21-23). As Judge
Lehrburger explained, “[i]t is well established that, under New York’s ‘borrowing
statute’ that ‘when a nonresident sues on a cause of action accruing outside
New York, the cause of action must be timely under the limitation periods of
both New York and the jurisdiction where the cause of action accrued.’”
(Report 51 (quoting Homeward Residential, Inc. v. Sand Canyon Corp., 499 F.
Supp. 3d 18, 24 (S.D.N.Y. 2020), aff’d, No. 20-4068-cv, 2022 WL 402389 (2d
Cir. Feb. 10, 2022) (summary order) (internal quotation marks omitted))).
Judge Lehrburger further explained that “[w]hen an alleged injury is purely
economic, the place of injury usually is where the plaintiff resides and sustains
the economic impact of the loss.” (Id. at 53 (quoting Glob. Fin. Corp. v. Triarc
Corp., 93 N.Y.2d 525, 529 (1999)). See also Homeward Residential, Inc., 2022
WL 402389, at *2 (same). Observing that “PacLife has consistently argued that
it is located in and operates out of California,” Judge Lehrburger found that
“PacLife is a resident of California and suffered its alleged economic injuries in
California,” and thus that Plaintiffs were required to demonstrate that their
claims were timely under both New York’s and California’s statutes of
limitations. (Report 53).
63
Plaintiffs mount two brief, and ultimately unavailing, attacks on the
Report’s finding that California law supplies the relevant limitations period.
First, Plaintiffs argue that the Report erred by finding that their residence is
determined by their principal place of business (California) rather than their
place of incorporation (Nebraska and Arizona). (Pl. Br. 22). In this regard,
Plaintiffs assert that “[f]or a corporation, the place of residence under [New
York’s borrowing statute] is either the state of incorporation or principal place
of business,” and that several “New York courts have found that the residence
is the place of incorporation” under the borrowing statute. (Id.). But these
assertions are legal truisms that say nothing about where Plaintiffs reside or
where they suffered the economic harm for which they seek redress in this
case. Indeed, Plaintiffs’ brief does not dispute Judge Lehrburger’s observation
that Plaintiffs suffered their economic injuries in California (Report 53) and
does not identify any injuries that they experienced in Nebraska or Arizona (see
Pl. Br. 22-23). Further, the Second Circuit has explicitly declined to follow the
cases recited in Plaintiffs’ brief, explaining that “the New York Court of Appeals
would likely hold that [economic] claims accrue at a corporation’s principal
place of business” because “[i]t would seem that an economic harm has greater
effect on a for-profit enterprise’s activities at its principal place of business
rather than at its place of incorporation.” Luv N’ Care, Ltd v. Goldberg Cohen,
LLP, 703 F. App’x 26, 28 n.1 (2d Cir. 2017) (summary order). Plaintiffs have
not identified any reason why this logic is inapplicable here.
64
Second, Plaintiffs argue that “the special significance that the place of
incorporation has for regulated insurance companies” should have led Judge
Lehrburger to find that Nebraska and Arizona provide the limitation periods
applicable to their claims. (Pl. Br. 22-23). But beyond merely asserting that
there is significance to an insurer’s place of incorporation, Plaintiffs offer no
evidence or argument that undercuts the authorities discussed above. Instead,
Plaintiffs cite two insurance treatises for the uncontroversial propositions that
(i) “[a]n insurer is a ‘domestic’ insurer in the state in which it is organized to do
business” and (ii) “[t]he insurance commissioner in the insurer’s state of
domicile is often referred to as the ‘lead’ regulator.” (Pl. Br. 23 (quoting 2 NEW
APPLEMAN ON INSURANCE LAW LIBRARY EDITION § 8.04 (2021) and 9 NEW APPLEMAN
ON INSURANCE
LAW LIBRARY EDITION § 98.01 (2021))). Neither these treatises nor
Plaintiffs’ limited quotations from them suggest that the Report erred in its
analysis of New York’s borrowing statute, and the Court therefore adopts Judge
Lehrburger’s analysis in full.
b.
All of Plaintiffs’ Pre-Settlement Claims Are Time-Barred 18
The Court fully agrees with Judge Lehrburger that to the extent any of
Plaintiffs’ claims necessarily relies on Defendant’s failures to take action with
18
As the Report notes, the Settlement’s marking of the accrual period is its principal
holding on the limitations issue. Any specific discussion by Judge Lehrburger of
different types of claims constitutes an alternative holding. (See Report 56 (“By virtue of
[Defendant’s] entry into the Settlement, all of [Plaintiffs’] pre-Settlement claims are
barred by the statute of limitations. But even if [Plaintiffs’] claims were not grounded in
negating the Settlement, most of its claims would still be time-barred.”)).
On this point, it is worth responding to Plaintiffs’ contention that four categories of
claims went unchallenged on timeliness grounds: (i) Re-Sec Trust claims; (ii) servicing
damages; (iii) Defendant’s failure to seek repurchase of loans with loan breaches
discovered in April 2011; and (iv) conflict of interest claims. (Pl. Br. 21). This Court
65
respect to possible claims Defendant released against Countrywide, such
claims are time-barred. Of note, the Court reaches this conclusion without
entering the legal thicket of the Report’s res judicata analysis, and, relatedly,
without having to determine whether this case is properly characterized as one
seeking negation of the Settlement.
As discussed, the Settlement Agreement was sweeping. It released any
and all claims and alleged EODs “in contract, tort, or otherwise” that the
parties may have had against Countrywide “arising out of or relating to” three
categories of claims. (Settlement ¶ 9). Those categories include: (i) claims
premised on the origination, sale, or delivery of mortgage loans to the trusts
and “any alleged obligation” to address alleged defects or R&W breaches
pertaining to origination, sale, or delivery of mortgage loans, including through
repurchase or curing; (ii) claims premised on addressing defective, incomplete,
or non-existent mortgage loan documentation; and (iii) claims premised on the
servicing of loans, including obligations to provide notice or enforce repurchase
obligations. (Id.).
Plaintiffs cannot escape the Settlement’s impact on the accrual of their
claims premised on Defendant enforcing Countrywide’s duties, regardless of
whether the Article 77 judgment in fact bars Plaintiffs from bringing such
agrees with Defendant that Judge Lehrburger did in fact address the timeliness of these
claims, insofar as Plaintiffs’ “theories related to [these claims] all boil down to the same
theory of liability that Judge Lehrburger found” to be time-barred by the Settlement.
(Def. Opp. 21-22). As discussed in this Opinion, the Court agrees with Judge
Lehrburger that theories of liability that necessarily depend on Defendant’s failure to
provide notice or to enforce remedies against Countrywide accrued on June 28, 2011.
66
claims. Time and time again, Plaintiffs have recognized that many of their
claims depend on Defendant’s alleged failure to enforce Countrywide’s
contractual duties, including curing and repurchasing obligations. For
example, in arguing that their claims are “compatible with the Article 77
judgment,” Plaintiffs point out that they “asserted no contract claims against
[Defendant] in the Article 77 proceeding,” and that such claims were “outside
the scope of the proceeding.” (Dkt. #272 (Plaintiffs’ reply summary judgment
memorandum of law) at 17). But that is Plaintiffs’ only basis for contending
that their claims went unaffected by the Article 77 judgment. (See, e.g., Pl. Br.
6 (arguing that the Article 77 proceeding “does not begin to address, however,
whether [Defendant] breached its contractual obligations to these
certificateholders under these PSAs by forgoing putting loans back to
Countrywide, bringing suit to enforce repurchase if needed, and failing to
exercise all of its rights and remedies after EODs” (emphasis added))).
The fact remains that as of June 28, 2011, Defendant could not further
enforce these contractual duties concerning pre-Settlement affairs. And that is
because Defendant released any possible claims and remedies it might have
pertaining to R&W, document defect, and servicing breaches against
Countrywide through the vehicle of the Settlement. As Judge Lehrburger
notes, under Plaintiffs’ theories of breach, “[t]he culmination of [failures to
provide notice of and enforce remedies for Countrywide breaches] was
[Defendant’s] entry into the Settlement with Countrywide,” because the
Settlement “prohibited [Defendant] from commencing any litigation based upon
67
any of the released claims.” (Report 55 (citing Settlement ¶ 15(a))). Plaintiffs’
response to the Report’s logic on this point is a feint: Rather than engage with
the Settlement and its effect on accrual of their claims, Plaintiffs return to their
mantra that Plaintiffs “did not assert a challenge to the Settlement [at the time
of the motion to dismiss], and they do not do so now, rendering June 28,
2011[,] an inappropriate accrual date for any claims.” (Pl. Br. 25). Even if
true, the statement is beside the point. What matters is that Plaintiffs are
claiming that Defendant committed acts of breach by failing to police
Countrywide and exercise remedies under the PSAs.
Whether the Settlement is better construed as Defendant fulfilling or
abdicating its duties to certificateholders does not matter. Once Defendant
entered into the Settlement, it could not take the actions that Plaintiffs contend
were necessary to avoid Defendant’s own breaches. 19 As Judge Lehrburger
noted, under New York law, the cause of action for breach of contract accrues
when the breach occurs. (Report 55). California law is the same. See, e.g.,
Deutsche Bank Nat’l Tr. Co. v. Barclays Bank PLC, 34 N.Y.3d 327, 341 (2019).
By outright declaring that the Settlement released claims against Countrywide,
19
Plaintiffs also objects to the Report on the basis that it found that New York accrual
rules applied, irrespective of the borrowing statute. (See Report 55 n.38; Pl. Br. 25
n.17). The Court agrees that both states’ laws apply with respect to accrual, see, e.g.,
Deutsche Bank Nat’l Tr. Co. v. Barclays Bank PLC, 34 N.Y.3d 327, 340 (2019), but this
point was immaterial. Judge Lehrburger noted that New York’s accrual rules control
merely for the proposition that “[u]nder New York law, contract claims accrue upon
breach.” (Report 55). Plaintiffs’ own cited authority notes that California law is the
same. Deutsche Bank, 34 N.Y.3d at 341 (“In any event, plaintiff’s arguments are
unavailing even under California law. In both New York and California, a breach of
contract cause of action generally accrues upon the breach.”). Plaintiff does not explain
how Judge Lehrburger’s choice of New York accrual principles had any effect on the
outcome of his analysis with respect to the Settlement.
68
the Settlement necessarily means that Defendant compromised its ability to
enforce. Thus, to the extent that Plaintiffs’ claims are premised on failures to
enforce, this Court fully adopts Judge Lehrburger’s accrual finding:
Defendant’s “alleged breach of its duties to [Plaintiffs] crystallized at the point
of entry into the agreement.” (Report 56). As such, the Court adopts the
Report’s finding that Plaintiffs’ claims “for any failure by [Defendant] to act to
provide notice to certificateholders or enforce remedies against Countrywide
accrued no later than June 28, 2011,” which falls outside California’s four-year
statute of limitations. (Id.). The Court likewise adopts the finding that
Plaintiffs’ breach of fiduciary duty and negligence claims premised on the same
grounds fall outside the statute of limitations, which would be the case even if
accrual were tethered to judicial approval of the Settlement. 20
Plaintiffs’ attempts to recast the Settlement’s effect on the accrual of their
claims fail. Principally, Plaintiffs contend that “the signing of the Settlement
has no legal significance, because by its own terms the Settlement was not
final, but would be rendered void, unless and until approved by the court.” (Pl.
Br. 25). In other words, Plaintiffs would have the accrual date tied to the
January 31, 2014 court approval of the Settlement (if the Settlement is at all
relevant), rather than the June 28, 2011 signing. (Id.). Further, Plaintiffs point
to Paragraphs 15(a) and (b) of the Settlement, which they contend contemplate
20
Defendant requests that the Court find that two additional categories of claims are also
barred by res judicata and the logic of the above limitations analysis beyond what Judge
Lehrburger found. (Def. Br. 12-16). Again, the Court does not believe it necessary to go
beyond the Report. (Id. at 14 (noting that “the Court could defer this issue to a later
report”)).
69
“potential enforcement action by specifying the procedures that [Defendant]
should follow for such enforcement.” (Id.).
These arguments are without merit. In no uncertain terms, Defendant
covenanted upon signing to
not take any action with respect to any Covered Trust
that is intended or reasonably could be expected to be
adverse to or inconsistent with the intent, terms, and
conditions of the Settlement and this Agreement, and
will not commence or assist in the commencement of
any litigation based upon any of the claims subject to
the release and waiver in Paragraph 9.
(Settlement ¶ 15(a) (emphasis added)). These actions are precisely what
Plaintiffs now claim Defendant should have done. Defendant made these
promises — not to sue, not to enforce, and not to take actions inconsistent with
the broad release — in June 2011, years before court approval of the
Settlement. Simply because the Article 77 court did not approve the
Settlement until three years later does not mean that the Settlement had no
force between Defendant and Countrywide. To the extent that the Settlement
(i) notes that “[a]bsent direction from the Settlement Court,” Defendant would
take no action (id.), and (ii) contemplates dollar-for-dollar reductions for postsigning date repurchases (id. ¶ 15(b)), these provisions do not affect the release,
nor do they change the fact that Defendant had specifically forsworn
enforcement in June 2011. Plaintiffs mistake a possibility — having to take
actions contrary to the Settlement if the Article 77 court so ordered — for
Defendant apparently agreeing to a self-defeating duty to continue enforcement
despite the covenants. (Def. Opp. 28-29).
70
Further, Plaintiffs gain no traction by arguing that the Settlement could
be voided by lack of approval by the Article 77 court. Again, the covenant not
to enforce and sue was in place regardless of approval. Additionally, Plaintiffs’
theory of breach is that Defendant should have taken the very actions against
Countrywide that it covenanted not to do based on claims Defendant released
through the Settlement. At a minimum, then, Defendant’s signing of the
Settlement and agreement to stand down with respect to enforcement is an
anticipatory repudiation, which would have kicked in the limitations period
regardless of final approval. See, e.g., Lucente v. Int’l Bus. Machs. Corp., 310
F.3d 243, 258 (2d Cir. 2002) (“Anticipatory repudiation occurs when, before the
time to performance has arisen, a party to a contract declares his intention not
to fulfill a contractual duty.”). Courts analyzing analogous circumstances
where a trustee publicly forswore taking action with respect to claimed
breaches have similarly tied accrual to the trustee’s announcement that it
would not take further action. See, e.g., Phoenix Light SF Ltd. v. Deutsche Bank
Nat’l Tr. Co., 585 F. Supp. 3d 540, 578 (S.D.N.Y. 2022) (finding loss EOD
claims time-barred because trustee’s “decision to take no action absent
investor direction is [a] single, discrete decision, and any alleged harm
sustained by the [p]laintiffs was caused by that decision”), aff’d sub nom.
Phoenix Light SF Ltd. v. Bank of New York Mellon, 66 F.4th 365 (2d Cir. 2023);
PL/WF, 2022 WL 2702616, at *26 (“Defendant committed its alleged breach
upon learning of the EODs and … informing investors that it would not take
action to address them.”); Ambac Assurance Corp. v. U.S. Bank Nat’l Ass’n,
71
No. 17 Civ. 2614 (PAE) (KHP), 2022 WL 4621431, at *16 (S.D.N.Y. Sept. 30,
2022) (cataloging cases, including the instant case, in which “[t]he common
thread … is that the trustee’s actions had eliminated any opportunity on the
part of the trusts to recover via lawsuits against originators, triggering an
earlier accrual of claims against the trustee based on these actions”).
In sum, the Court agrees with Judge Lehrburger that Defendant’s entry
into the Settlement marks the moment of accrual for Plaintiffs’ claims based on
Defendant’s failure to provide notice to certificateholders and to enforce the
PSAs’ remedies against Countrywide. (Report 55-56). Thus, using the
June 28, 2011 date, Plaintiffs’ contract claims discussed in this section of the
Report are time-barred by function of the California four-year statute of
limitations, and Plaintiffs’ negligence and fiduciary duty claims based on the
same are barred by both California’s and New York’s statutes of limitations
(two and three years, respectively). 21
21
The Court declines to adopt the Report’s recommendations concerning specific time
bars for pre-EOD document defect claims and post-EOD claims. As noted, Judge
Lehrburger’s discussion of specific issues for these claims are alternative findings
without regard to the Settlement. This Court agrees with Judge Lehrburger that the
Settlement date is the accrual date for many of Plaintiffs’ claims, and thus the majority
of these claims are barred irrespective of Judge Lehrburger’s alternative findings.
To be clear, this Court agrees with Judge Lehrburger’s decision to apply the reasonable
time rule to accrual of claims. And the Court finds Judge Lehrburger’s analysis
reasonable. That said, the Court agrees with Judge Paul A. Engelmayer’s discussion in
Ambac Assurance Corporation v. U.S. Bank National Association concerning nearly
identical PSA language and similar put-back claims to those at issue here. 2022 WL
4621431. In Ambac, the court found that the defendant had conflated its duty to notify
with its follow-on duty to enforce, which Plaintiffs here similarly argue. Id. at *9.
Because trustees may also have a duty to enforce, including by bringing put-back suits,
Ambac found that stacking the limitations periods for such claims makes sense (i.e.,
running the limitations period based on when the underlying limitations period ran).
Id.; see also Phoenix Light SF Ltd. v. Wells Fargo Bank, N.A., No. 14 Civ. 10102 (KPF)
(SN), 2022 WL 2702616, at *25 (S.D.N.Y. July 12, 2022) (“Given the parties’
disagreement as to what constituted a reasonable time for Defendant to discharge its
72
c.
The Open Repudiation Doctrine Is Not Applicable
Plaintiffs also challenge Judge Lehrburger’s rejection of their arguments
premised on the open repudiation doctrine. Plaintiffs contend that, because “a
statute of limitations does not begin to run until there has been an open
repudiation by the trustee,” and because Defendant has offered no such proof
of repudiation, their claims remain timely under California law. (Pl. Br. 23-24).
Plaintiffs accuse Judge Lehrburger of “brush[ing] off” their “long line of
California cases in a footnote.” (Id. at 24 (citing Report 70 n.51)). But Judge
Lehrburger’s terse treatment of this argument was warranted. Plaintiffs’ cited
enforcement duties, the Court cannot conclude as a matter of law that a reasonable
time for performance had expired.”). Though this Court need not adopt a stacking
theory as a matter of law, it has reviewed the evidence in this case, including Plaintiffs’
expert reports and contemporaneous documents suggesting that even Defendant and
Countrywide were confused about the PSAs’ time limits. Given this evidence and the
developing line of cases discussed in and applied by Ambac, the Court declines to adopt
the Report’s alternative findings pertaining to document defect claims. Cf. Ambac, 2022
WL 4621421, at *17 (“In sum, the assembled evidence, viewed in light of the apposite
precedents, supply a sufficient basis for Ambac’s claim that U.S. Bank had until the
date on which the statutory limitations period expired to carry out its enforcement
responsibility against CHL, including by means of bringing a putback lawsuit.”).
Likewise, though the Court agrees with Judge Lehrburger’s rejection of the continuing
breach theory with respect to post-EOD claims and his finding that post-EOD claims
premised on provision of the 60-day notice (PSA § 7.03(a)) are mostly time-barred,
Plaintiffs appear also to press claims based on Section 8.01 of the PSAs, which states
that “[i]n case an Event of Default has occurred and remains uncured, the Trustee shall
exercise such of the rights and powers vested in it by this Agreement, and use the same
degree of care and skill in their exercise as a prudent person would exercise or use
under the circumstances in the conduct of such person’s own affairs” (id. § 8.01). It is
unclear from Plaintiffs’ papers whether they are arguing that these “prudent person”
claims are timely based on the continuing breach theory or because a reasonable time
has not passed. As in Ambac, the PSAs are silent with respect to Defendant’s
compliance with its prudent person duties. Ambac, 2022 WL 4621421, at *18. Thus,
“[l]ike the question of the ‘reasonable timeframe’ to comply with pre-EODs obligation to
sue [the servicer], the question of when a ‘prudent person’ would sue [the servicer] is a
fact-intensive question.” Id. Judge Engelmayer largely found that the post-EOD
timeliness analysis tracked that of pre-EOD claims; this Court agrees, and does not
believe that summary judgment on these alternative timeliness grounds is justified
based on the conflicting evidence. Again, this point only affects post-settlement postEOD claims, as Judge Lehrburger properly found.
73
authority is indeed “inapt.” (Report 70 n.51). See England v. Winslow, 196
Cal. 260, 263 (1925) (concerning claim for accounting and payment over of
trust money); Higgins v. Higgins, 11 Cal. App. 5th 648, 663 (2017) (concerning
repudiation of express voluntary trust and creation of constructive trust); In re
Schwarzkopf, 626 F.3d 1032, 1037 (9th Cir. 2010) (similar analysis);
Manchester Band of Pomo Indians, Inc. v. United States, 363 F. Supp. 1238,
1241 (N.D. Cal. 1973) (concerning claim that defendants mismanaged assets
held in trust).
Plaintiffs read the broad language employed in these cases to mean that
the statute of limitations for their claims does not come into play until
Defendant “repudiates” the Trusts. But the claims in those cases do not map
easily onto those raised here. The Court instead accepts Defendant’s more
nuanced view of when the doctrine is applicable: “when the dispute is whether
property that the defendant holds belongs to the defendant personally or is
held by the defendant in trust,” or where other unique trust claims, such as an
accounting, are at issue. (Def. Opp. 26). In other words, the doctrine is
consistent with New York’s open repudiation doctrine, which Plaintiffs do not
attempt to refute. (Pl. Reply 12). See Deutsche Bank Nat’l Tr. Co., 172 F. Supp.
3d at 708 (“[T]he open repudiation doctrine applies only when the remedy
sought is an accounting or other form of equitable relief, not a remedy at law.”);
see also, e.g., 3 WITKIN, CAL. PROC. 6th Actions § 735 (2023) (discussing delayed
accrual in actions against fiduciary for, e.g., actions to establish express trusts
and actions to establish resulting trusts).
74
In any event, to the extent that Plaintiffs’ claims are dependent upon
Defendant enforcing duties and remedies that it released as to Countrywide
through the Settlement, the Settlement constituted an open repudiation under
Plaintiffs’ theory. Plaintiffs cite a plain statement of California law for the
proposition that “repudiation of a trust is not effective, and therefore cannot
commence the running of the statute of limitations, unless and until the fact of
repudiation is brought home to the beneficiary.” Strasberg v. Odyssey Grp.,
Inc., 51 Cal. App. 4th 906, 917 (1996). But that is the sum total of their
rebuttal of Defendant’s position that the Settlement — “when [Defendant] very
publicly announced that it did not plan to sue Countrywide” and thus forswore
enforcing the remedies and duties Plaintiffs argue it must have — was not an
open repudiation of the Trusts. (Def. Opp. 27). Plaintiff offers no reason for
why the Settlement would not constitute knowledge or notice of the
repudiation.
d.
The Discovery Rule Is Not Applicable
Plaintiffs likewise contend that none of their claims is time-barred based
on another aspect of California law: the discovery rule. (Pl. Br. 32). Both in
their summary judgment briefing (see, e.g., Dkt. #246 at 68-69), and in their
current objections (Pl. Br. 32), Plaintiffs contend that certain employee witness
testimony suggests that Plaintiffs were unaware of breaches. 22 Thus, Plaintiffs
argue that at a minimum Judge Lehrburger improperly weighed conflicting
22
The Court has reviewed this evidence, which is decidedly mixed for Plaintiffs’ arguments
on this point.
75
evidence at the summary judgment stage in finding that the discovery rule was
inapplicable. (Id. at 34).
The Court fully adopts Judge Lehrburger’s analysis. “In order to invoke
the delayed discovery exception to the statute of limitations, the plaintiff must
specifically plead facts which show [i] the time and manner of discovery and
[ii] the inability to have made earlier discovery despite reasonable diligence.”
Allen v. Similasan Corp., 96 F. Supp. 3d 1063, 1071 (S.D. Cal. 2015) (quoting
Yumul v. Smart Balance, Inc., 733 F. Supp. 2d 1117, 1130 (C.D. Cal. 2010)).
As the California Supreme Court has explained, “the discovery rule most
frequently applies when it is particularly difficult for the plaintiff to observe or
understand the breach of duty, or when the injury itself (or its cause) is hidden
or beyond what the ordinary person could be expected to understand”; courts
decline to apply the rule when “the basis for a claim has been published in the
public record or has been the subject of publicity[.]” Shively v. Bozanich, 31
Cal. 4th 1230, 1248 (2003), as modified (Dec. 22, 2003).
Contrary to Plaintiffs’ suggestion that ambiguity in any of the evidence
counsels in favor of not granting summary judgment to Defendant on this
issue, “[i]t is the burden of the plaintiff to ‘show a triable issue of fact under the
discovery rule and the corollary rule of fraudulent concealment’ when the
applicable statute of limitations would otherwise bar the plaintiff’s claims, as in
the instant case.” Rustico v. Intuitive Surgical, Inc., 424 F. Supp. 3d 720, 737
(N.D. Cal. 2019) (quoting Ornelas v. Yamaha Motor Corp., No. A104665, 2004
WL 2191324, at *3 (Cal. App. Sept. 30, 2004)), aff’d, 993 F.3d 1085 (9th Cir.
76
2021). “Since the investigation is not for the purpose of establishing sure
knowledge of another’s fault, but only a suspicion, the rendition of summary
judgment in favor of defendants … is more common than might initially be
supposed.” Id. (quoting Bristol-Myers Squibb Co. v. Superior Court, 32 Cal. App.
4th 959, 964 (1995)).
Judge Lehrburger did not impermissibly weigh evidence in reaching his
conclusion. Rather, he applied straightforward California law. Though
Plaintiffs’ witnesses may have introduced a degree of ambiguity into the record,
uncontroverted evidence shows that Plaintiffs could have discovered the bases
for bringing this suit through reasonable diligence. (See, e.g., Houpt Decl.,
Ex. 11 (Bloomberg article concerning Defendant’s refusal to address demand
from investors to pursue repurchases, which was circulated internally by
Plaintiffs); Ex. 2 (witness testimony concerning the same); Ex. 12-13 (investor
letter sent to Countrywide and Defendant concerning breaches, and internal
email discussing the letter, noting that “[i]nterestingly the letter does not direct
the trustee to review loan files for breaches of reps and warranties, but instead
begins a process to force a change in servicer”)). Plaintiffs acknowledged these
issues, as well as the very public statements from other investors concerning
breaches in myriad trusts, well before developments in the Western & Southern
case in 2016. See The Western and Southern Life Ins. Co. v. The Bank of New
York Mellon, No. A1302490, 2017 WL 3392856 (Ohio Com. Pl. Aug. 04, 2017).
As Judge Lehrburger noted, Plaintiffs’ appeal to Western & Southern should be
viewed with deep skepticism; indeed, the plaintiff in that case felt that it had a
77
basis to sue years prior to the complaint in this case, as did many other
investors. (Report 72-73). Plaintiffs did not need to appreciate with precision
the bases for their claims for the discovery rule to be inapplicable; rather, if
they could have discovered these claims through reasonable diligence — relying
on their own knowledge of possible breaches, public news of the issues
associated with Countrywide and Defendant, and other information — the rule
would not apply. The evidence discussed in the Report shows that this is the
case.
In their objections, Plaintiffs do not address Judge Lehrburger’s more
basic point that the Article 77 proceeding clearly put them on notice of their
claims. (Report 73-74). Plaintiffs merely state that the Report’s finding that
the Article 77 proceeding gave them “reason to suspect” a factual basis for their
claims is “conjecture.” (Pl. Br. 33). But the Court need not perfectly determine
what Plaintiffs knew and did not know in order to find the discovery rule
inapplicable; “if reasonable minds can draw only one conclusion from the
proffered evidence, the application of the discovery rule becomes a question of
law.” Rustico, 424 F. Supp. 3d at 737. No reasonable mind could find that
Plaintiffs had no reason to suspect the bases for their instant claims, at least
by the time of the Settlement and the Article 77 proceeding.
e.
Defendant Is Not Estopped from Raising a Limitations
Defense
Finally, Plaintiffs contend that Judge Lehrburger erred by rejecting their
argument that Defendant — as a fiduciary — is estopped from raising any
limitations defenses. Judge Lehrburger rejected Plaintiffs’ position because he
78
found that (i) the acts or alleged concealment forming the basis for Plaintiffs’
estoppel argument form the basis for Plaintiffs’ claims; and (ii) the acts or
omissions to which Plaintiffs point were not intended to induce Plaintiffs from
filing suit, but rather for other purposes, including placating Countrywide or
avoiding taking on additional duties. (Report 76-77).
As Judge Lehrburger noted, a party may avail itself of an exception to the
general rule that it must show affirmative deception where a fiduciary duty
exists. (Report 75-76). In such cases, concealment or nondisclosure of the
relevant facts suffices. See Ross v. Louise Wise Servs., Inc., 8 N.Y.3d 478, 491
(2007); Cross v. Bonded Adjustment Bureau, 48 Cal. App. 4th 266, 281 (1996),
as modified (Aug. 8, 1996). However, a party may not rely on the same acts or
omissions that give rise to its claims to argue that the estoppel doctrine is
applicable. See, e.g., N.Y.S. Workers’ Comp. Bd. v. Fuller & LaFiura, CPAs, P.C.,
46 N.Y.S.3d 266, 273 (3d Dep’t 2017).
The Court agrees with Judge Lehrburger that Plaintiffs’ estoppel
argument fails because it relies on the same bases as Plaintiffs’ other claims.
Once again, Plaintiffs’ claims distill to criticisms that Defendant both failed to
provide notice of EODs and other breaches, and failed to enforce rights and
remedies based on EODs pursuant to the PSAs. Plaintiffs’ theory of estoppel is
that the trustee had a duty to “disclose EODs and breaches.” (Pl. Reply 18).
The Court can discern no daylight between these claims, on the one hand, and
Plaintiffs’ theory of concealment by Defendant, on the other. See, e.g.,
Cusimano v. Schnurr, 27 N.Y.S.3d 135, 140-41 (1st Dep’t 2016) (“[E]quitable
79
estoppel is inapplicable because the alleged fraudulent concealment forms the
basis of both plaintiff’s estoppel argument and the underlying claims[.]”).
In any event, “[t]he doctrine of equitable estoppel will not apply if the
plaintiff possesses timely knowledge sufficient to place him or her under a duty
to make inquiry and ascertain all the relevant facts prior to the expiration of
the applicable [s]tatute of [l]imitations.” McIvor v. Di Benedetto, 503 N.Y.S.2d
836, 838 (2d Dep’t 1986); see also Gregory v. Venbrook Ins. Servs.,
No. B230860, 2012 WL 5505058, at *16 (Cal. Ct. App. Nov. 14, 2012)
(unpublished). As discussed above in the context of the inapplicability of the
discovery rule to Plaintiffs’ claims, Plaintiffs had sufficient knowledge to
ascertain the bases for their claims, regardless of any alleged concealment by
Defendant.
4.
The Court Grants Defendant’s Motion for Summary Judgment
on Plaintiffs’ Tort Claims
In its final section, the Report recommends granting Defendant’s motion
for summary judgment with respect to two categories of tort claims this Court
did not previously dismiss: due care and conflict of interest. (Report 78). The
Court addresses Plaintiffs’ objections to the Report’s findings on these two
categories in that order, though it recognizes that Plaintiffs’ arguments
pertaining to conflict of interest are more robust.
Plaintiffs devote one paragraph in their objections to contesting Judge
Lehrburger’s recommendation that this Court grant Defendant summary
judgment on their due care claims. (Pl. Br. 40). Plaintiffs do not dispute that
the obligation to exercise due care applies only to non-discretionary, ministerial
80
tasks. (Report 79). Nor do they seek to distinguish the wealth of cases cited by
Judge Lehrburger — or, indeed, offer any evidence to suggest that Judge
Lehrburger misunderstood their claims premised on notices of EODs.
Plaintiffs’ due care theory is plainly foreclosed by the cases cited in the Report,
including Commerce Bank. See Com. Bank, 35 N.Y.S.3d at 66 (“[I]n order to
give plaintiffs such notice, defendant would have had to monitor other parties.
A failure to monitor other parties plainly do[es] not involve the performance of
basic non-discretionary ministerial tasks[.]” (internal quotation marks and
citation omitted)). Because Plaintiffs’ due care claim does not involve
performance of ministerial tasks, Defendant is entitled to summary judgment.
Plaintiffs offer a more extensive objection to Judge Lehrburger’s
recommendation that this Court grant summary judgment in favor of
Defendant on their conflict of interest claim. On this point, Plaintiffs contend
that Judge Lehrburger both disregarded evidence favorable to them and
impermissibly weighed conflicting evidence in making this determination. (Pl.
Br. 37-39). The Court identifies no triable issue based on this evidence, and
agrees with Judge Lehrburger’s assessment of the conflict of interest claim.
The Court begins by reviewing the evidence discussed by the parties and
Judge Lehrburger. Some of these documents address general concerns over
Defendant’s management of its relationship with Countrywide in the context of
Defendant’s role as trustee. (See, e.g., Kane Decl., Ex. 236 (email sent from
Davina Zeidel stating “[g]iven the statute and sensitivity surrounding this
relationship [with Countrywide], we will not ask them for an original
81
incumbency certificate going forward”); Ex. 237 (“[S]o we are going to hold
[C]ountrywide’s hand to the fire and not sign something…. [I] don’t think this
is going to help our relationship continue in a positive manner.”); Ex. 238 (“We
need to continue to represent Countrywide with high standards, while
maintaining our role as trustee.”); Ex. 148 (“Prefer to leave [reference to control
over servicers] out, not so much as it may cause an issue with our servicers …
but more so … that I don’t want us to be viewed as having any sway/influence
over what the Servicer does.”)). Others discuss the management of the at-times
fraught relationship with Countrywide leading up to the Settlement. (See, e.g.,
id., Ex. 35 (“[W]e have been working hard to AVOID a formal declaration of an
EOD…. [T]he whole point of the forbearance agreement is to toll the running of
time … [and] create some breathing room to work with BoA toward a plan that
avoids an EOD and allows for review of the files.”); Ex. 145 (deposition
testimony concerning the same); Ex. 146 (email exchange discussing similar
considerations)). Plaintiffs contend that this evidence supports three ways in
which Defendant was motivated by a conflict of interest: (i) it pursued joint
interests with Countrywide, contrary to certificateholders’ interests; (ii) it
avoided declaring EODs in order to not be subject to heightened duties; and
(iii) it prioritized its relationship with Countrywide over its duties to
certificateholders. (Pl. Br. 37).
“To prove a conflict-of-interest claim, [a plaintiff] must show ‘specific acts
of self-dealing.’” CB/USB, 457 F. Supp. 3d at 262 (quoting Ellington Credit
Fund, Ltd. v. Select Portfolio Servicing, Inc., 837 F. Supp. 2d 162, 193 (S.D.N.Y.
82
2011); see also Fixed Income Shares: Series M v. Citibank N.A., 314 F. Supp. 3d
552, 562 (S.D.N.Y. 2018) (“Plaintiffs do not provide any concrete evidence that
the Trustee’s actions were influenced in any way by a conflict of interest. That
is, conclusory assertions aside, [p]laintiffs fail to prove that, by virtue of any
conflict of interest, Citibank caused them concrete harm.”). Though Plaintiffs
marshal the most nefarious sound bites from their proffered evidence, this
Court, like Judge Lehrburger, has reviewed the full context of the evidence and
cited conversations. There is a difference between weighing conflicting
evidence on the one hand, and finding that no reasonable juror could find a
cognizable conflict of interest on the other. The latter was what Judge
Lehrburger did, and his conclusions were correct. Having reviewed the same
evidence, this Court does not perceive a conflict of interest simply because
Defendant was concerned about maintaining a productive relationship with
Countrywide — indeed, the Court would expect that any entities working
closely together would be equally concerned with maintaining a close working
relationship. Moreover, as Judge Lehrburger found, Plaintiffs fail to show how
these issues “caused them concrete harm.” Fixed Income Shares, 314 F. Supp.
3d at 562.
Plaintiffs’ most concrete examples of a potential conflict concern
communications leading up to the Settlement. But the fact that Defendant was
concerned with taking actions that would compromise getting the Settlement
done did not engender a conflict of interest. As discussed, New York courts
found that the Settlement was in certificateholders’ best interest. See, e.g.,
83
Mellon I, 2014 WL 1057187, at *17 (“The Trustee argues that the evidence
shows that the real reason it entered into the Forbearance Agreement was to
avoid litigation over the question of whether or not an event of default had
occurred as a matter of law, which litigation ultimately would have delayed any
prospect of settlement.”). In short, this Court agrees with Judge Lehrburger’s
decision to properly contextualize documentary evidence and testimony, and to
find that in any event Plaintiffs failed to tie any alleged conflict to concrete
harms.
5.
The Court Adopts in Full Judge Lehrburger’s Findings
Regarding Trusts with No Damages and Defendant’s
Affirmative Defenses
Neither party has objected to Judge Lehrburger’s findings that
(i) Plaintiffs’ contract claims for trusts for which Plaintiffs have not introduced
evidence of damages should not be dismissed; and (ii) Defendant’s affirmative
defenses of champerty, monoline insurance coverage, collateral source, failure
to mitigate, and absence of reliance should be dismissed. Having reviewed the
parties’ summary judgment arguments on these points and Judge Lehrburger’s
recommendations, the Court finds no clear error in Judge Lehrburger’s
findings on these points and adopts them in full.
CONCLUSION
For the reasons discussed in this Opinion, the Court adopts the majority
of the Report’s findings and analysis. Specifically, the Court: (i) adopts in full
its standing analysis; (ii) adopts in full its issue preclusion analysis; (iii) adopts
its analysis that the Settlement Date bars many of Plaintiffs’ claims, and rejects
84
in part its analysis of the timeliness of specific claims; (iv) adopts its tort claims
analysis; and (v) adopts those findings to which the parties have not objected.
The remainder of the parties’ cross-motions for summary judgment are denied
without prejudice to their renewal before Judge Lehrburger. The parties are
hereby ORDERED to submit a joint letter proposing redactions to this Opinion
on or before August 11, 2023.
The Clerk of Court is directed to unstay this case and to terminate the
motions pending at docket entries 231 and 245. The Clerk of Court is further
directed to file this Order under seal, viewable only to the parties and the
Court.
The Court refers this case back to Judge Lehrburger for proceedings
consistent with this Opinion.
SO ORDERED.
Dated:
July 14, 2023
New York, New York
__________________________________
KATHERINE POLK FAILLA
United States District Judge
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